Question mark over pension tax relief
Spring 2007
A little noticed change that took effect on 6 April 2006 – pensions tax simplification A-Day – was a new rule about tax relief for employers’ contributions to registered pension schemes.
Previously, employer contributions to occupational schemes (but not personal pensions) were statutorily entitled to tax relief. But now, pension payments have to meet the same criterion as all other business expenses: they have to be wholly and exclusively for the purpose of the trade. Spreading of the deduction into future years may still be required for exceptionally large contributions.
So far, so straightforward, except that the practical application of the ‘wholly and exclusively' test for pension contributions remains uncertain. Employer pension contributions are more efficient than employee payments because of the national insurance savings, but they would rapidly lose their attraction if there is any doubt that the employer will get full tax relief.
Normally, questions only arise in relation to controlling directors and husbands or wives or other people who are connected with them. Pension payments form part of a remuneration package, so the real issue is whether the whole pay package is wholly and exclusively for the purpose of the business. There should be no need to consider the split between salary, pension payments and other benefits. However HM Revenue & Customs (HMRC) does seem to look more closely at large pension payments. HMRC has said it will allow tax relief for an employer's contributions for a controlling director or connected person if the payment is'in line with a contribution that would have been made for an unconnected employee in a similar situation’. This may be very difficult to judge in the case of a controlling director where nobody else does a similar job.
It seems that individual tax inspectors are interpreting the new rule inconsistently and HMRC’s pension specialists have not yet produced definitive guidance. Until then, there can be no guarantee of tax relief and HMRC will not express any opinion in advance of paying the contribution.
