Contractors can only claim a limited amount of the cost of financial advice. HMRC allows up to £150 including VAT as a business expense, even if the advice is for a company pension scheme. Any additional fees must be paid personally by the contractor, or they face an additional tax charge.
“Although in large businesses the employer typically picks up the tab for pensions advice to their employees, they often spread the cost over many employees. However, HMRC’s rules don’t allow for the additional costs that typical small companies such as contractor limited companies incur for their employees,” says James Abbott, owner and head of tax at contractor accountant Abbott Moore.
The only exceptions are when a contractor creates a ‘wrapper’ for their pension investments, which they typically manage personally, and for debt counselling. “Fees for financial advice can be charged to the ‘wrapper’, but contractors should not consider this option without taking advice from a qualified financial advisor. Contractor’s limited companies can claim the full fees of welfare counselling on debt problems.”
Contractors increasingly pay for financial advice
Contractors are increasingly paying for financial advice, particularly for company pension schemes, rather than the financial advisor receiving their remuneration via commission on the financial products they sell.
This trend is likely to increase when the Financial Conduct Authority's significant Retail Distribution Review (RDR) reforms come into force in 2013. From 1 January 2013 financial advisors have to choose whether they will remain truly independent, and charge fees, or be tied to specific financial services organisations offering financial products like pensions and investments, and take a commission.
A contractor can expect to pay many hundreds or even thousands of pounds for financial advice, depending on their needs and the complexity of the advice
James Abbott, Abbott Moore LLP
“A contractor can expect to pay many hundreds or even thousands of pounds for financial advice, depending on their needs and the complexity of the advice,” continues Abbott. “The cost of this advice must be borne personally by the contractor. If the company pays the fees, then the contractor incurs a benefit in kind tax charge.”
HMRC’s rules: the first £150 of financial advice fees are exempt
As Abbott explains, HMRC exempts the first £150 of financial advice fees, but even that gesture has a sting in its tail: “A contractor’s limited company, which is technically the contractor’s employer, can pay up to £150, including VAT, of any financial advice fees provided to its contractor employee. Payment must be made direct to the provider to avoid incurring a benefit in kind charge.
“However,” he continues, “if the contractor’s limited company employer pays more than £150, then the whole amount is subject to benefit in kind charges, not just the excess. The benefit in kind will result in income tax at the contractor’s highest rate and the limited company will be liable for National Insurance Contributions (NICs) of 13.8%.”
Abbott suggests that contractors incurring costs in excess of £150 ask their financial adviser to issue two invoices: one to the value of £150 including VAT in the name of the company, and the balance billed directly to the contractor for payment personally.
“There are still some independent financial advisors who do not realise that their fees are not fully tax deductible,” says Abbott. “Contractors incurring fees for financial advice should ensure they only claim up to £150 including VAT and pay the balance personally.”