TQOTW: Pension contributions
My client is a trading company which is proposing to make large pension contributions for the directors. Will the company be able to get a deduction from trading profits for the contributions? 

Deductibility

For the contributions to be a deductible expense for the company, they would firstly have to be wholly and exclusively incurred for the purposes of the trade in line with CTA 2009 s54. Whether an expense is wholly and exclusively is always subjective and each case would have to be considered as to the reason for the contribution.

Typically, a contribution made by an employer to an employee’s pension scheme will be deductible as an expense as part of the employee’s overall remuneration package. It is necessary to consider however whether there is a non-trade purpose for the company making the contribution. HMRC give guidance on what would be considered a non-trade purpose in their manual at BIM46035.

If the remuneration package, inclusive of the employer pension contribution, is excessive for the level of work done by the director, this would not meet the wholly and exclusively test and the excess would not be deductible.

If the contribution is made in the final period of trade, it would need to be considered whether the payment is made as part of the normal costs of employing staff or whether the cost is incurred as part of going out of business. If, for example, there is a contractual obligation to make the pension contribution, the fact that the contribution is made in the final period of trade does not necessarily mean it does not meet the wholly and exclusively test. HMRC have further guidance on deductions for pension contributions on cessation of trade at BIM46040.

Timing of Deduction

Pension contributions are usually deductible for tax purposes in the period in which they are paid not when they are accrued (FA 2004 s196).

Tax relief for employer contributions will be spread over several accounting periods if certain conditions are met when contributions are paid over two successive periods (FA 2004 s197):

–          Employer contributions made in the current period exceed 210% of the contributions made in the preceding period

–          The excess of the current period contributions above 110% of the preceding periods contributions exceeds £500,000.

If both conditions are met, the excess of current period contributions over 110% of the preceding periods contributions will be spread over the current and subsequent accounting periods. There is further guidance on how the contributions will be spread at PTM043400.

Consequences for the directors

There may also be income tax implications for the directors. If the pension input, taking into account contributions made by the directors themselves, exceeds the director’s annual allowance for the tax year, the difference will be subjected to the annual allowance charge. (FA 2004 s227) The amount of the allowance is £40,000 per tax year (subject to tapering provisions, see PTM057100) and can be increased by unused annual allowances from the previous three tax years providing the director was a member of a registered pension scheme in those tax years. (FA 2004 s228A)

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