My VIP Tax Team question of the week: Employer Pension Contributions

My client runs their own limited trading business. She is a 100% shareholder and sole director. Her husband is an employee where he does some minimal administrative duties. She is considering making some pension contributions from the business to both herself and her husband and would like to know if there are any restrictions in the amount they can pay, and anything else they should be considering.

There are two main things you need to consider when making employer pension contributions:

1. Ensuring the payments are wholly and exclusively incurred for the purposes of the trade to qualify for corporation tax relief; and
2. The payments are within the employees’ individual Annual Allowance.

Corporation Tax Relief
Relief is only available for a trading company if the payments meet the wholly and exclusively test as per s54 CTA 2009. For the controlling director there is more flexibility in their level of the remuneration per HMRC at BIM47106. However, the contributions still have to meet the wholly and exclusively test.

HMRC provide commentary on this at BIM46035, stating “where the contribution is part of a remuneration package paid wholly and exclusively for the purposes of the trade, then the contribution is an allowable expense”.

Additional comments in BIM47105, state “Evidence that the remuneration may not be a genuine trade expense is where it exceeds a reasonable level of the reward for the value of the work undertaken by that individual for the employer on a commercial basis

(for a more detailed look into this test, BIM47105 includes a lists of case law considering where the wholly and exclusively test was not met)

The husband who provides very minimal services to the company, would have a commensurate remuneration package. Therefore, the pension contributions, as part of that remuneration package, would need to be reasonable for the value of services he is providing to the business.

It appears that HMRC are not taking an unduly rigid position, but caution should be applied to remuneration for family members. Also avoid creating a loss by the pension contributions which would make it difficult to argue the contributions were wholly and exclusively incurred.

Annual Allowance
Unlike personal pension contributions, there is no need to consider the individuals Relevant Earnings, as there is no personal tax relief for employer pension contributions. For the individual, the important thing to consider is the Annual Allowance. If total contribution inputs are in excess of their annual allowance (personally or via employer contributions), they will incur an annual allowance tax charge.

The annual allowance for 23/24 Tax Year is currently £60,000 per annum. This would be reduced if your client has ‘threshold income’ above £200,000 and ‘adjusted income’ above £260,000. The following link provides more information on how to calculate the tapered annual allowance: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance.

Additionally, your clients can consider the carry forward of unused annual allowances from the previous three tax years. However, please note that the carry forward is only available for tax years in which there was an active pension scheme. Therefore, if you are only just setting up a first pension scheme in the current tax year, there would be no carry forward available.

More a more in-depth look into the rules around the Annual Allowance, please refer to HMRC’s guidance at PTM051100

 


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