Tax Relief for Company Pension Contributions

Up until A Day (6 April 2006) pension contributions by companies were generally allowable where they fell within certain criteria, often based on calculations by actuaries. From 6 April 2006 however, it is necessary for the pension contribution to be "wholly and exclusively" for the purposes of the trade and relief will not be available where there is a non-trade purpose.

One situation where a company pension contribution may not meet the wholly and exclusively test is where it is paid in respect of a director who is a controlling shareholder or a close friend or relative.

This will create uncertainty and H M Revenue & Customs may enquire whether company contributions meet the test and look for evidence such as:

• If there are comparable third party employees with similar salaries and benefits, are the company pension contributions also similar?
• If the pension contribution for the controlling shareholder or his wife is greater than the contribution made for the third party employee, is there a business reason for this? If not there may be a non-trade purpose with no corporation tax relief being given for at least part of the payment.
• Are there special circumstances? There may be a pension fund deficit which is being made up by the company?
• Is the salary level commensurate with the work undertaken by the director or spouse for the company? If the salary is excessive then it is likely that the pension contribution will be for a non-business purpose.
• Is a low salary being paid combined with a large pension contribution.
  Again, the rationale for this will have to be established and whether this strategy has been adopted for tax or NIC planning purposes. Many companies have adopted a strategy of remunerating director/shareholders by way of a modest salary and pension contribution, combined with a dividend.

Speak to us if you may be affected and we can consider your strategy in light of available HMRC guidance.