Remuneration

Question 1

To set up an appropriate remuneration strategy and establish a range of appropriate benefits from Alan and Lydia’s new company
1. Outline the key benefits for Alan and Lydia of using a combination of low salary and dividends for their future income from AQ Pack Ltd
Salary

Answer 1

Salary:
• Salary within Personal Allowance / £12,570 / no income tax due
• Still entitled to State Benefits / State Pension accrual if above LEL
• Retains starting rate band for savings / Personal Savings Allowance (PSA)
• Employment allowance on National Insurance may be available / can pay up to Primary
Threshold
• Salary reduces Corporation Tax liability / Salary is deductible expense

Question 2

Outline the key benefits for Alan and Lydia of using a combination of low salary and dividends for their future income from AQ Pack Ltd
Dividends

Answer 2

Dividends:
• Dividends can be stopped / increased in line with profits / salary can continue if company makes a loss
• Can use Dividend Allowances of £2,000 / DA not currently being used
• Dividends taxed at lower rate than Income Tax for Basic Rate Taxpayers / 7.5% (increasing to
8.75% for 2022/2023 tax year)
• No National Insurance on dividends

Question 3

Explain the Alan and Lydia the benefits of setting up protection policies via their new company instead of on a personal basis

Answer 3

• Premiums may be deductible for Corporation Tax purposes / allowable business expense
• Personal policies paid from net income / disposable income / saves National Insurance
• Higher cover / not linked to earnings
• Key person cover available / protects company
• Executive Income Protection can protect both salaries / dividends / pension contributions
• Relevant life cover / Death in Service (DIS)
• Set up under Trust / tax free
• Relevant Life / DIS / Executive Income Protection is a not a benefit in kind

Question 4

Explain the benefits for Alan and Lydia if they set up individual Relevant Life policies for themselves through AQ Pack Ltd

Answer 4

• Provides life cover, which they don’t have at present
• Premiums are paid by the company / saves premium costs for Alan and Lydia
• Deductible against Corporation Tax / allowable expense
• Policy pays out to a beneficiary / in trust / Alan and Lydia can individually name the
beneficiaries
• Payment is tax free to the beneficiaries
• Not a benefit in kind / no tax charge for Alan or Lydia
• No impact on pensions lifetime allowance

Question 5

Recommend and justify how AQ Pack Ltd can set up a suitable, tax efficient, individual life policies for Alan and Lydia to ensure their family is financially protected in the event of either of their deaths

Answer 5

• Should set up 2x individual Relevant Life plans
• The policy will provide life cover only / provide a lump sum on death
• With Alan and Lydia as the lives assured
• The company, as the policy holder
• The contributions will be a deductible business expense
• And will not be classed as a benefit in kind for Alan or Lydia, or the company
• The sum assured should be an amount to protect the loss of their income and share value /
projected income / salary
• The term should be until Alan and Lydia intend to retire / age 60
• The policy must be written under a discretionary trust
• And so will not form part of their estates for IHT purposes
• And is also not written under pension rules
• So will not count towards their lifetime allowance
• And should be indexed to allow for inflation

Question 6

You have recommended that Alan and Lydia, once they commence taking remuneration from AQ Pack Ltd, protect their income by taking out an income protection policy.
Outline why you have recommended that an income protection policy should be set up; and explain why this should be set up as an executive income protection policy established by their company, rather than as a personal contract taken out by them individually
Income protection

Answer 6

Why income protection
• Pays a regular income
• Until their intended retirement ages
• Cannot be cancelled if policy terms are adhered to
• And can be linked to inflation to maintain the value of the benefit
• And will pay out on their inability to perform their own role

Question 7

Outline why you have recommended that an income protection policy should be set up; and explain why this should be set up as an executive income protection policy established by their company, rather than as a personal contract taken out by them individually

Executive income protection

Answer 7

Why Executive Income Protection
• Typically, higher levels of cover are available
• As dividend payments can also be covered
• Which is important as otherwise they may have an income shortfall
• The policy can also cover employer NICs
• And pension payments
• This ensures that their State benefits continue to accrue
• And their pension payments continue
• The income paid to Alan / Lydia from the executive income protection contract is taxable /
paid via PAYE
• And so counts as relevant earnings
• Which would allow them the to make tax relievable pension contributions based on these
earnings if they so wished
• As a result they are more likely to be able to maintain their desired lifestyle in retirement
• As the income paid from a personal contract does not count as relevant earnings / does not
allow sufficient pension contributions to be made