Finance Act 2013 - The Bill, Part 2

Following the budget in early October, the Government have wasted no time in introducing Finance Bill 2013 (2) which, among other things, makes provision for how Noonan’s pension amendments are to take effect. Paul Gilmer sets out some of the key points from the first draft of the bill:

1. New Standard Fund Threshold (SFT)

As expected, the SFT has been reduced, but by a lot less than most expected. Finance Bill 2013 (2) reduces the €2.3 million cap down to €2 million with effect from 1 January 2014. However, as on previous occasions, an individual who has pension rights in excess of this new lower SFT limit on 1 January 2014 may claim a Personal Fund Threshold from the Revenue Commissioners (see note 2).

The new lump sum rules are:

1. Maximum tax relieved lump sum at 25% of €2,000,000 = €500,000
2. The first €200,000 tax free.
3. €300,000 taxed at 20%


Individuals with the capacity to fund to the €2.3 million mark should act before the 31 December 2013.

2. New .15 Levy

Minister for Finance Michael Noonan has followed through on the Government’s commitment to end the pension levy  of 0.6 per cent a year but disappointingly didn’t waste any time in introducing a new levy of .15 per cent for the years 2014 and 2015. Unfortunately, it seems that the levy is going to be a feature on the pension landscape for the foreseeable future.


3. Revenue are introducing e-filing for the new round of Personal Fund Thresholds (PFTs):

In order to make a PFT notification to Revenue, an individual will be required to obtain from the administrator of each pension arrangement of which he or she is a member, a statement certifying, among other things, the amount of the individual’s pension rights on 1 January 2014 relating to that arrangement. A PFT notification will have to be made electronically on a system being developed by Revenue and the time period for notification will be 12 months after the date on which the electronic system is made available.

A PFT notification made by electronic means shall be deemed to include a declaration to the effect that the notification is correct and complete.

Revenue will also accept a PFT application in the normal way for those retiring before the electronic system in place.

4. Another benefit to the public sector high earners:

The reimbursement options, introduced in Finance Act 2012, for public servants affected by chargeable excess tax (who, unlike affected individuals in the private sector, cannot generally minimise or prevent the breaching of the SFT or PFT by ceasing contributions and benefit accruals) are being amended and extended.  This will reduce the amount that can be recovered upfront from the net retirement lump sum payable to the individual to a maximum of 20 per cent (from 50 per cent) and to include the option of reimbursement of the pension fund administrator solely by way of a reduction in the gross pension payable over a period not exceeding 20 years.

5. There is more detail on the new rules for valuing pension benefits:

The valuation factor to be used for establishing the capital value of an individual’s defined benefit (DB) pension rights at the point of retirement, where this takes place after 1 January 2014, is being changed from the current standard valuation factor of 20 to a higher age–related valuation factor that will vary with the individual’s age at the point at which the pension rights are drawn down. The age–related valuation factors range from 37 for DB pension rights drawn down at age 50 or under, to a factor of 22 where they are drawn down at age 70 or over.  The valuation will also distinguish between benefits accrued before 1 January 2014 (still valued at 20 times) to those accruing after 1 January 2014 (valued based on the age related factors).

6. Clarification of the early access to AVCs

The bill provides clarity for members of occupational pension schemes/PRSAs regarding the option to withdraw up to 30 per cent of the accumulated value of additional voluntary contributions. The bill is amended to address concerns that the existing override provisions in the section may not give scheme trustees and PRSA administrators sufficient scope to allow such withdrawals where the trust deed and scheme rules or the PRSA contract terms prohibit them. The amendment specifically provides that the option may be exercised by an individual, notwithstanding the rules of the retirement benefits scheme or the terms of the PRSA contract concerned. This will obviate the need for scheme rules or contract terms to be changed to facilitate the withdrawal option. The change applies to options exercised on or after 27 March 2013, the date Finance Act 2013 became law.

Of course, we are all hoping this is the end to what has become an annual event whereby amendments are made to the Irish Pension Regime. However, lessons from the levy show we should not be too optimistic.

Paul Gilmer

Director

ITC Consulting

4 Reasons to Recommend ITC

Independent Trustee Company are delighted to announce that we have been shortlisted in four categories for the Irish Pension Awards 2013. The awards, which will take place on the 27^th of November 2013, aim to give recognition to pension funds and providers who have proved their excellence, professionalism and dedication to maintaining high standards of Irish pension provision.

The categories that we have been shortlisted for can be seen below.

• Pensions Consultancy of the Year (ITC Consulting)
• Pension Scheme Administration of the Year (ITC)
• Communication Award (ITC)
• Innovation Award (ITC) (ITL)

We are delighted to be shortlisted in the category nominations listed above. More information on the awards can be found here.

Fianna Fail Launches Pension Strategy Paper

The Fianna Fail pension strategy, launched today by Willie O’Dea, deals with several issues close to our heart:

1.       The funding requirements for DB schemes

2.       The priority order for DB schemes on wind up

3.       Early Access to Pensions and

4.       The issue of Pension Charges

As chair of the Pensions Committee of the IBA I have actively involved in communicating with politicians of all shades on the issues facing pensions. The paper launched by Willie O’Dea is testament to the fact that patient and consistent dialogue does have an impact.

The funding levels DB schemes have to met is set at artificially high levels due to:

1.       the historically low level of bond yields and

2.       the additional reserve requirement imposed by the current government

The Paper proposes that this be addressed by easing the funding requirements and allowing greater flexibility as to when and if annuities are purchased.

In relation to the priority order the Paper suggests that, once a certain level of pension has been guaranteed in priority to pensioners the balance should rank equally with other members of the scheme. This would address the big gap in benefit that can exist between members either side of retirement age.

The current early access regime is too restrictive (as it only applies to AVCS) and mean spirited (as it imposes an additional 41% tax on those in difficult financial circumstances). The solution proposed is to replace it with an option to take some or all of your tax free lump sum at any stage in your life. There is no loss of tax to government and the greater flexibility enhances the attractiveness of pensions and gives relief where it is due.

On pension charges the Paper proposes the development of a Total Expense Ratio so that fund manager costs can be more easily identified. Also greater transparency on other costs is advocated.

 

To view the full paper click here.

Written by Aidan McLoughlin

Independent Trustee Company

Managing Director

Budget 2013 - Pension Related Changes

In his budget speech, Minister Noonan declared that it was in everyone’s best interest that the Government encourage as many citizens as possible to continue to invest in pension schemes.  This does not seem to have been the Government’s view over the last few years with, among other things the introduction of the pensions levy and talk of cutting tax relief on contributions introducing a lot of uncertainty into the market.  A number of industry bodies over the last 12 months have been lobbying government in an effort to bring some certainty back in to the market. Now the minister appears to have delivered in this regard.  The positive news from a pension’s perspective in the budget was the clear statements that:

 

• The Pensions Levy will not be renewed after 2014; and
• Tax relief on pension contributions will continue to be available the marginal rate.

These are welcome statements as they will serve to lift some of the cloud that has been hanging over the pensions industry over the last few years.

The minister did announce, however, that future tax relief on pension contributions would only serve to subsidise pension schemes that deliver an income of up to €60k per annum.  These changes will not take effect until 1^st January 2014.  Therefore for now, the question remains as to how this measure will be implemented.  The minister appears to be leaning towards a further reduction in the Standard Fund Threshold (SFT), which currently stands at €2.3m and the minister described as being “very generous”. 

The question remains as to how €60k per annum will be valued for this purpose?  If the same valuation rules as were used for the calculation of the €2.3m threshold were followed, then the capital value of €60k per annum would result in a SFT of €1.2m.  The minister did state that the Government would engage in consultation with the industry on the specific changes required.  This dialogue has in fact already commenced and the proposal from the industry is to capitalise the €60k at a factor of 30 times plus the lump sum to give an SFT of €2m.  If this proposal is implemented, it is estimated that it will affect around 17,000 individuals.  When we consider that the average pension fund is around €100k, a reduction in the SFT should not discourage the majority of the market from continuing to fund for retirement.

The final pension-related change of significance is the provision allowing pension investors to withdraw up to 30% of the value of their AVCs for a three year period from 2013.  Income tax at the marginal rate will be payable on the funds accessed.  The Government estimates that €200m of funds will be accessed in this way over the three year period.  It remains to be seen whether this will apply solely to AVC’s or whether personal pension contributions will be included.  We will have to wait for the Finance Bill in the new year for the detail in that regard.

Overall, it appears that the Government are making a significant attempt to restore some certainty to the pensions market and to encourage investment in pension schemes once again.  While we will have to wait until 2014 for the detail in relation to the maximum tax relieved pension of €60k per annum, the forewarning provides an opportunity for those who may be affected to take action over the next 12 months.

Jennie Faughnan

Tax Consultant

ITC Consulting

Budget 2013 - Act Now?

Every year around this time we see a lot of clients wishing to take action before Budget day. Whether it is making contributions or accessing their benefits, the general sense is that, while they don’t know what will happen in the Budget, they don’t expect there to be many changes for the better.

This year is no different and with reports in the media every day speculating about what changes Budget 2013 will bring, when it comes to your and your clients’ pensions, what should you do?

Tax Relief on Contributions

There is much speculation that tax relief on pension contributions will be cut for marginal rate tax payers.  This was one of the proposals in the Programme for Government and the National Pensions Framework and one of the few pension related changes that has not yet been implemented.  Tax relief for marginal rate tax payers may be cut to 20%. 

Could you still avail of the higher rate of tax relief if you make your pension contribution before the Budget? 

Pension Fund Threshold

The pension fund threshold imposes an excess fund tax on pension funds over €2.3m at the date at which they are accessed. This threshold was reduced in 2010 from €5.4m. The Fine Gael manifesto stated that they intended to reduce this to €1.5m. There is much talk in the media that ministers believe that an annual pension of €60k should be enough for anyone in retirement. Using the same capitalisation factor used to value the fund threshold, this would equate to a threshold of €1.2m. In reality, however, a fund of €1.2m would not buy you an annual pension of €60k.  It is more likely to buy an income of around €30k per annum. 

If the threshold is to be reduced in the Budget, should you fund your pension as close to the €2.3m threshold as you can now?

Pension Cap

The other way of restricting pension benefits to an annual income of €60k would be to impose a “super tax” on pension payments above €60k per annum or to limit tax relief on contributions which deliver a pension in excess of €60k.  This would appear to be a more popular method as it would target those on large pensions who we have heard so much about in the media recently. 

However, with the minister for health recently stating that the average annual cost of a nursing home is €100k per annum, the €60k annual pension does not sound like it would go too far if these circumstances arose for you in retirement.  In this context, it may not make sense to fund up to the maximum fund threshold at this time as you may be penalised by the “super tax” when you drawdown your benefits.

Unfortunately, we don’t have a crystal ball and we can not predict what changes Budget 2013 will bring. It does, however, provide an opportunity to review your and your clients’ pension provisions and assess what options may be available.

Jennie Faughnan

ITC Consulting

ITC, in conjunction with the Irish Brokers Association are holding a Budget Briefing Webinar on Thursday December 6th. The briefing will focus on pension changes, capital taxes and retirement planning. Register below to reserve your place. Due to popular demand a second webinar has been scheduled and spaces are limited.

OECD Review: Financial Sustainability

In our last post on the OECD review, we discussed how Ireland's policy stance measured up against key criteria, looking at the performance of the Social Insurance Fund. Another item on the OECD's agenda is that of financial stability and how it is evaluated through international analysis. The first step to this evaluation is to look at international comparisons. 

As you can see from the chart below, in 2010, Ireland ranked somewhat average in our public expenditure on pensions, with the inclusion of all government pension costs; contributory, social welfare pensions, non-contributory pensions and public sector pensions.

If you look at the next chart, you can see that the projected change in expenditure is quite significant between 2010 and 2060, Ireland projected to rank third on the table.

The charts highlight the rising cost of State funded pensions which the National Pensions Reserve Fund (NPRF) was intended to offset.

Broadly speaking 1/3^rd of the NPRF covered public sector pensions whilst 2/3rds covered social welfare pensions.

The fastest increasing cost is public sector pensions. These grew from an estimated capital cost of €75bn in 2007 to €129bn in 2009. No figures have been produced since, however it is likely that that cost has continued growing.

Source: OECD Review of Pensions in Ireland, 14.09.2012. John Martin, Edward Whitehouse, Anna D'Addio, Andrew Reilly. 

OECD Review of Pensions in Ireland

At a recent consultation forum in Farmleigh House, the OECD presented the first part of their review of pension policy in Ireland. The presentation, which focused on the initial stage of the review; assessment and evaluation, was presented by John Martin and Ed Whitehouse. ITC's Managing Director Aidan McLoughlin attended the forum and over the coming weeks we will bring you some of the main points discussed. 

As mentioned, the initial stage of the review is the assessment and evaluation stage. The second stage which will presented at the end of the year will see recommendations from the OECD.

The OECD set out a three-pronged strategy for achieving both adequacy and sustainability:

• longer working lives
• greater private-pension savings
• better targeting of public retirement- income provision on those most in need

They ask how does Ireland's policy stance measure up against key criteria?

A key test was the performance of the Social Insurance Fund. This is where PRSI contributions are paid and which will ultimately provide contributors with Social Welfare pensions. Its ability to do this depends on its solvency. As the following slide illustrates the view of 2010 (as projected in 2007) and the actual outcome is radically different – a 30% deficit has now materialised. This fundamentally challenges the ability of the State to continue to deliver Social Welfare pensions at current levels. Those relying on the State for a significant portion of their retirement income should think again.

Over the coming weeks we will discuss the steps taken to resolve this significant deficit and see overseas comparisons in relation to pension provision. 

Source: OECD Review of Pensions in Ireland, 14.09.2012. John Martin, Edward Whitehouse, Anna D'Addio, Andrew Reilly. 

Generation Y Not

Retirement is too far off and I prefer to enjoy my money now. Sound like what you would expect to hear from a twenty something today? Well it’s not far off! In a recent survey commissioned by ITC, retirement being too far off was found to be the main factor for the reluctance to invest in a pension amongst Generation Y.

Described as the ‘here and now’ generation, it seems that Generation Y view retirement planning as somewhat of an afterthought. In a time when staying with your current employer for longer than three years seems like a lifetime, joining a company pension plan is probably not a top priority for most. But how sustainable is this and what does it mean for the future of this generation? Do they hope to rely on the state pension, currently valued at €12,000 per annum or have they even thought about it? Growing up in an era of prosperity yet arriving at a destination of economic turmoil, are many simply avoiding their financial responsibilities?

Is the issue the challenge of engagement or has the industry simply not tried? Generation Y are seen as the hardest generation to reach, not surprising given the media rich environment that they have grown up in. As an industry, is it our duty to highlight the issue in a way that will force this young population to stand up and pay attention? By 2025 Generation Y will make up 75% of the world’s workforce. This is a scary statistic when you fast forward to retirement time.

Are the consequences of enjoying money now to be realised too late for Generation Y? Not if we adapt our strategies to suit their needs. An on the go generation that demand convenience and accessibility, a pension plan to suit Generations Y’s lifestyle is lacking within the marketplace. But what would the ideal pension product for this demographic look like? It must start with ease of access, the option of early drawdown and bundled solutions that will allow for planning opportunities. We are in need of a product that will work in harmony with the lifestyle choices of the individual.

The dramatic change in how consumers of this generation engage with products demands that we adapt our strategies in order to stay relevant. The product has to be right but indeed so does the message. Pensions need to be marketed in a way that is relatable; relating the cost back to real life terms and demonstrating the consequences of not making retirement provisions.

There is an exciting opportunity here if it is executed in the right way.

Melanie Farrell

Independent Trustee Company

Dáil Drawdown - NPRF

In this installment of Dáil Drawdown, Deputy Michael McGrath asks the Minister for Finance for more information on the National Pensions Reserve Fund.

Source:www.oireachtas.ie

Dáil Drawdown - Drawdown of Pension Funds

Source: www.oireachtas.ie

Dáil Drawdown

Dáil Drawdown is a new edition to our blog and brings you recent pension news straight from the Dáil Chamber. Here is our first installment.

Source: www.oireachtas.ie

We asked a 1000 people…

As an industry we know that:

• the current ratio of people working versus those in retirement will half over the next two decades,
• the pending pension burden is unlikely to be absorbed by the state,
• approximately 50% of people working in Ireland do not have a pension and
• life and pension sales according to the IIF (Irish Insurance Federation) 2012 annual report has fallen to “barely 40% of their 2007 peak”.

Unsurprisingly, pensions coverage is being debated ad nausem by the entire pensions industry. However, amongst all the various discussion, debates and column inches the view of the Irish public is often overlooked.

As a result of this, Independent Trustee Company commissioned a RED C survey to investigate why people are reluctant to invest in pensions. We surveyed over 1000 people with some interesting results;

Findings

• Whilst affordability is an issue, it is not the overriding problem, poor performance and access are also a major cause of concern.
• ‘A fear of losing money’ and ‘affordability’ were found to be the main concerns for female respondents.
• Male respondents were more likely to mention ‘retirement being too far off ‘ and ‘an overall lack of trust’ than their female counterparts.
• Middle-aged respondents were most likely to mention ‘a fear of losing some or all of the money’.
• ‘Affordability’ was most likely to be mentioned by people aged 35-54 years.
• Those over 65 years of age; and younger adults were most likely to say that ‘pensions are too complicated’.

We are still digesting these results but it is clear that the lack of pension investment cannot be dismissed as a problem caused by “the economy”. We believe these results have highlighted the need for transparent and secure pension products. Some industry “experts” would lead you to believe that we need to educate the public; this is rubbish, the industry needs to provide people with a product that is designed with them as the consumer in mind and not the other way around!

Michael Keyes

Sales & Marketing Director

Aidan McLoughlin discusses upcoming regulation and future changes in the Irish Pension Market at EPI Summit

Aidan McLoughlin, Managing Director of Independent Trustee Company recently attended the European Pension and Investment Summit in the Netherlands. As a delegate at the event, Aidan was asked his opinion on upcoming regulation, the European approach to structuring pensions and future changes in the Irish pension market. You can view the full interview by clicking on the image below.

Independent Trustee Company

Buying Property through a Self-administered Pension

A report issued on Monday 26th March from the Central Statistics Office confirmed that residential property prices fell by almost 18 per cent in the year to February. Recent surveys have estimated that property prices have actually fallen by 55 per cent to 60 per cent from the peak.

While property prices have fallen dramatically, a recent CSO report has shown that Irish residential rents are continuing to rise 3% annually. This presents an opportunity for individuals who are fortunate enough to have cash in their companies and wish to invest in property. How this can be achieved in the most tax efficient way is the next question.

                                                                 CSO Report. Residential Property Price Index. [Image Online].Available at: http://namawinelake.wordpress.com/2012/03/15/cso-reports-irish-residential-rents-continuing-to-rise-3-annually/. [Accessed 26/03/12].

There are three obvious ways of doing this:

• The cash could be extracted from the company by the shareholder of the company and the property purchased by the shareholder after paying income tax,
• the property could be purchased by the company or
• the property could be purchased through aself-administered pension.

The self-administered pension can be the most efficient route of achieving this for the reasons set out below.

Extracting cash and then buying the property

Extracting funds directly from the company to purchase the property personally would give rise to significant income tax and potentially company law problems, so that generally will not work. 

Buying property through the company

If the property is bought through a company, there will be corporation tax on rent received (as well as a close company surcharge). In addition there will potentially be corporation tax on chargeable gains, if the property is sold, although the new relief from CGT on sales of properties held for 7 years could help here. However the same tax problem described above when sales proceeds are extracted from the company will apply. It should also be noted there are anti-avoidance provisions which prevent cash extraction at CGT (rather than income tax) rates which could also come into play. Furthermore purchasing an investment property in a company can adversely impact on the availability of CGT retirement reliefs and  CAT business property reliefs which may be relevant in due course.     

Buying property through a self-administered pension 
The alternative is to purchase the property through a self-administered arrangement. On the basis that the required contribution can be made (which involves a funding assessment),

• a corporation tax deduction would be available for the company’s contribution and 
• the rent could be received tax free in the pension.
• there is no CGT on sale of Irish residential property by a pension

On retirement 25% of the fund can be taken tax-free by the client with the first €200,000 tax free with the balance from €200,000 to €575,000 taxed at 20%. The property could be transferred in specie to an ARF post retirement and could continue to generate a post retirement income.   

This illustrates how the self-administered route still makes sense as a tax efficient way to buy property.  

Barry Kennelly
Associate Director Solicitor AITI TEP
ITC Consulting

Women taking 'huge financial risks' by relying on partners for support

Thursday 8th March marks International Women’s Day. This day has been observed since the early 1900s and since then we have witnessed a significant change and attitudinal shift in both women's and society's thoughts about women's equality. With more women in the boardroom, greater equality in legislative rights, and an increased critical mass of women's visibility as impressive role models in every aspect of life, one could think that women have gained true equality.

Why then has a new academic study found that a majority of females rely on their partners to pay for their retirement?

Less than one in three women who are entitled to a state contributory pension qualify for the full €230 a week payment, a study by academics from NUI Galway and Queen's University, Belfast, found. A majority of men, by contrast, end up with the full state pension when they retire.

Women have inferior pensions compared with men because they are mainly engaged in low-paying jobs or only work part-time and do not earn enough to qualify for a full state pension, with most of them not paying into a private retirement fund.

The fact that the primary role of many women is caring also accounts for poor pension provision among women.

The study, 'Older Women Workers' Access to Pensions', found that many depend on their partners' or husbands' incomes for a secure future, even though they may well outlive them as women tend to have longer life expectancies. This is a high-risk strategy because they could be left with nothing in the event of a separation, divorce, widowhood, illness or redundancy.

Women only tend to become aware of the importance of having a personal pension late in life when it becomes too expensive to fund for an adequate pension.

With an aging population and the Trioka having already signalled that state benefits to pensioners should be reduced, the notion of a state sponsored retirement is a high risk strategy. Supplementary pension coverage and contributions through private pensions must be increased to improve adequacy of incomes in retirement. 

They say life begins at retirement and for many women while it will be nice to get out of the rat race, without an adequate private pension they have to learn to get along with a lot less cheese. 

Emer Kirk

Independent Trustee Company



You saw them here first!

For those of you who attended our Knowledge Forum in November 2010, you will remember Niall Harbison of Simply Zesty who spoke to us on 'Building your Brand through Social Media'. It was announced today that Simply Zesty have been acquired by UTV for £1.7 million. We would like to wish Niall and his team the very best of luck for the future. You can read the full article here.

Simply Zesty co-founders Niall Harbison and Lauren Fischer

Our next Knowledge Forum is taking place on Wednesday 14th March at 8.00am in the form of a webinar. The webinar titled 'What the Advisor needs to Know' will cover a 'Pensions Update' by Aidan McLoughlin, Managing Director of Independent Trustee Company and a presentation on 'Adopting your Business in a Changing Market' by Executive Coach John Murphy of John Murphy International.

An application for 1.5 hours of CPD will be made.


There are still a limited number of spaces available, please click on the link below to register.

As an advisor, how will the pensions levy affect your business?

Independent Financial Advisors provide advice on 70% of all contributions into private sector pensions in Ireland and, as professionals, are at the forefront of advising the Irish public to provide for income on retirement.

A poll conducted by Independent Trustee Company has revelaed that the vast majority of financial advisors believe that the pensions levy will negatively affect the amount contributed to private sector pension funds in one way or another over the next few years.

The question put to top Financial Advisors was “Following the new pension levy, how will this affect your clients’ future decisions to contribute to their pension fund?”

The results of the poll are highlighted below.

Pensions coverage in Ireland is still at an alarmingly low level with voluntary private pension coverage at 53% for people aged between 25-34 years. Adequacy of pensions savings is a major issue for people aged between 45-65 years. This is a long term issue that needs to be tackled and not exacerbated by a short-term need for cash. The government needs to support and incentivise people who are prepared to save for their later years. Tax relief on contributions is crucial to this and must be maintained and these benefits must also be highlighted to the Irish public.

Pensions, despite the levy, are still the most efficient way of saving for retirement.

Michael Keyes

Deadline for Personal Fund Threshold applications fast approaching

The deadline for applications for Personal Fund Thresholds (PFT) is now only one month away. June 7^th is the latest date that Revenue will accept applications for a PFT and to date less than 150 enquiries have been made to Revenue. It is estimated that over 6,000 individuals could be affected.

With the deadline fast approaching the key is planning; firstly to obtain the correct Personal Fund Threshold for your clients and secondly, to plan in order to minimise the impact of the threshold.  The traditional advice around pension planning may have to be adjusted based on your clients’ circumstances.

If you have a query regarding PFT you can contact our PFT Helpdesk on (01) 603 5199 or email pft@independent-trustee.com for an initial free assessment on your clients’ potential exposure.

Employing your spouse...what to keep in mind.

The idea of employing your spouse in your business can give rise to many advantages, but care needs to be taken in relation to how this is set up. There are many advantages to employing your spouse in your business; the greatest one is usually flexibility in terms of working hours! The fact that there is a direct personal and financial interest in the success of the business has a huge impact, although many businesses do not recognise the value of services provided by the ‘non-principal’ spouse, so the question of even a basic wage is never considered...Consider these questions to see whether this is something relevant to you:-

• Is your spouse assisting you in the business in an 'invisible' way – perhaps answering phones, taking orders, keeping the books, filing tax returns, doing payroll or indeed simply acting as a company director (more on that below)?
• Has a comprehensive list of what your spouse does ever been drawn up, or are diaries kept? Perhaps have them keep a diary for a month or so, which should give a good indication of the type of work they are doing, and how long it typically takes them to do it.
•  There is an intrinsic value in having someone available at times when you are not, does your spouse fill this description? When business contacts deal with your spouse, do they consider that they are still dealing with the business itself?
• If your spouse is a company director, this is a significant role of itself, as your spouse cannot delegate this responsibility to you. They are fully responsible for the activities of the company. No-one else would carry this responsibility for no pay, why should your spouse?

You may feel that your business cannot afford to pay your spouse – but perhaps wages or a salary could be accrued in your company accounts until times are better or more cash is available. This acknowledges the value brought by your spouse. No-one else would do this without payment! Some pointers for doing this:-

• Have a contract of employment drawn up for your spouse to include a full description of the role carried out by them
• Agree a structured payment and notify Revenue of the position. There are tax savings that can be generated by doing this, rather than having all allowances and credits claimed through one spouse.
• Do consider whether there are PAYE issues to be addressed. Bear in mind the impact of the USC which takes effect for anyone earning more than €77pw.
• In light of recent pension changes, consider whether it might be useful to have a separate pension structure for your spouse.

The bottom line here is that if you are going to do something, do it in a way that brings maximum benefits, taking care of all the details. Last thing anyone needs is a debate with Revenue over whether a spouse’s salary is justified!

If any of these issues are relevant to you and you would like more details please call (01) 6611022 or email justask@independent-trustee.com

Sonia McEntee