PTM043200 - Contributions: tax relief for employers: conditions
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Entitlement to tax relief
Changes to the normal rules for deductible expenses
Payment of a deficiency on a scheme wind up
When tax relief may be restricted
Multi-employer schemes
Contributions in respect of members who are directors who are shareholders or connected to a controlling director
Entitlement to tax relief
As a contribution needs to meet the ‘wholly and exclusively’ rule if tax relief is to be given, in computing the profits of a trade or profession for tax purposes, special consideration needs to be given in making any risk assessment to:
- schemes with multiple employers - see Multi-employer schemes, below, and
- contributions paid in respect of members who are controlling directors or are connected to a controlling director - see Contributions in respect of members who are directors who are shareholders or connected to a controlling director, below.
In order to prevent avoidance of the spreading rules (see PTM043400) certain payments by an employer involving a third party are treated for spreading purposes as if they are contributions by the employer to a registered pension scheme. For more details see PTM043400.
There are certain payments related to registered pension schemes which, although not strictly contributions to a registered pension scheme, are treated as if they were contributions by the pensions legislation. This means that employers can claim relief in respect of these payments in exactly the same way as they claim relief on contributions to registered pension schemes.
Tax relief can only be given on contributions that have actually been paid. The amount shown in the profit and loss account in respect of the obligations of defined benefit schemes may be substantially different from the amount of contributions paid to the scheme, but it is only the amount actually paid that can be considered for tax relief.
Tax relief on large contributions may be spread forward into future tax years - see PTM043400.
Changes to the normal rules for deductible expenses
The pension tax legislation amends the normal rules for allowable deductions slightly. These changes are as follows.
Employers carrying on a trade or profession
Section 196(2) Finance Act 2004
When working out the amount of the profits, pension contributions can only be deducted for the period of account in which they were paid. It is not possible to carry the contribution back or forward to other periods.
Employers with investment business
Section 196(3) Finance Act 2004
Employer contributions to a registered pension scheme will be deductible as an expense of management of the employer’s investment business under Chapter 2 of Part 16 of the Corporation Tax Act 2009 (expenses of management: companies with investment business)
But the legislation is modified so that:
- relief will be available to an employer’s contribution where, ordinarily, it would not be allowed because the contribution represents an expense of a capital nature, and
- the contributions can only be referred to the accounting period in which they are paid.
Employers who are life insurance companies
Section 196(4) Finance Act 2004
Employer contributions to a registered pension scheme will be deductible as an expense under section 76 Finance Act 2012.
Section 76 Finance Act 2012 is modified so that
- the contributions are brought into account in step 1 of section76 Finance Act 2012 if they would not otherwise be (and so are not regarded as capital expenses), and
- the contributions can only be referred to the accounting period in which they are paid.
See the Life Assurance Manual Chapter 12A (web) (External users please use http://www.hmrc.gov.uk/life-assurance/manual.htm) for further details about section 76 Finance Act 2012.
Spreading of relief on indirect contributions
Section 199A Finance Act 2004
In order to prevent avoidance of the spreading rules (see PTM043400) certain payments by an employer are treated for spreading purposes as if they are contributions to a registered pension scheme.
Payment of a deficiency on a scheme wind up
Section 199 Finance Act 2004
A scheme that is not a money purchase scheme may not have enough assets to cover its liabilities when it winds up. In these circumstances:
- section 75 Pensions Act 1995, or
- article 75 Pensions (Northern Ireland) Order 1995 (S.I. 1995/3213 (N.I. 22))
may impose a liability on an employer to make good the deficiency.
Where an employer makes such a payment to the trustees or manager of a registered pension scheme this will be deemed to be a contribution and so considered for tax relief.
Where an employer’s business has discontinued before it made the payment to the scheme tax relief can still be given by:
- treating the payment as made on the last day that the employer carried out their trade, profession, vocation or business, and
- to the same extent as tax relief would have been given if the employer’s business had not discontinued.
Pension Levy
Section 102 Finance Act 2004 The Pension Protection Fund (Tax) Regulations 2006 SI 2006/575
Part 2 of the Pensions Act 2004 established a Pension Protection Fund and a Fraud Compensation Fund. Statutory levies - the ‘Pensions Act levies’ - paid by employers to these funds are not contributions made to a registered pension scheme and so would not normally qualify for relief under section 196 Finance Act 2004. However regulation 21 of The Pension Protection Fund (Tax) Regulations 2006 provides that the Pensions Act levies will be deemed contributions under section 199 Finance Act 2004 which means that tax relief will be given for payment of the Pensions Act levies by an employer. For example where a sponsoring employer pays or provides a scheme with funding for the levy payments.
The provision in regulation 21 of The Pension Protection Fund (Tax) Regulations 2006 means that any relief given to a sum paid by an employer on account of any of the Pensions Act levies will not be spread.
Pensions Act levies
The Pensions Act 2004 levies are:
- the administration levy referred to in section 117(1);
- the initial levy referred to in section 174(1);
- the risk-based pension protection levy referred to in section 175(1)(a);
- the scheme-based pension protection levy referred to in section 175(1)(b);
- the fraud compensation levy referred to in section 189(1); and
- a levy in respect of eligible schemes imposed by regulations made under section 209(7) (the Ombudsman for the Board of the Pension Protection Fund).
Pension levies paid in-specie
If an employer wishes to pay one or more of the pension levies with an in-specie payment then it will be for the Board of the Pension Protection Fund to decide whether they can accept a pension levy payment in this form rather than in cash. This is not a matter for HMRC. If the Board of the Pension Protection Fund is prepared to accept an in-specie payment of a pension levy then the payment will not qualify for relief unless it meets the requirements set out in PTM042100.
When tax relief may be restricted
Section 196A Finance Act 2004
The Registered Pension Schemes (Restriction of Employers’ Relief) Regulations 2005 - SI 2005/3458
HMRC has the power to restrict tax relief on employer contributions paid in respect of members where:
- any of the benefits which the member may receive from a registered pension scheme are dependent on the non-payment of a benefit that the member was expecting to receive from an employer financed retirement benefits scheme (see PTM021000), and / or
- payment of benefits to the member from an employer financed retirement benefits scheme would reduce the transfer value of any rights in a registered pension scheme.
The details of when and how such a restriction will take place are set out in the Registered Pension Schemes (Restriction of Employers’ Relief) Regulations 2005 SI 2005/3458.
To establish the tax relief restriction on the employer’s contributions in respect of a member, the pension input amount for each of the member’s arrangements under the scheme is calculated in relation to the employer’s period of account in which the contributions are paid. The amount of the restriction on the relief is an amount equal to the aggregate of the pension input amounts for the period of account in question in respect of each arrangement under the scheme relating to the member.
Where the pension input period is being calculated in the case of cash balance arrangements and defined benefit arrangements, the amount of any relievable pension contributions paid by or on behalf of the member during the period of account in question is deducted from the closing value of the pension input amount. In the case of other money purchase arrangements, the pension input amount is established by taking into account only the employer’s contributions paid in respect of the member during the period of account in question.
Multi-employer schemes
Detailed guidance is provided in the Business Income Manual starting at BIM46000.
Contributions in respect of members who are directors who are shareholders or connected to a controlling director
Broadly, the employer’s contribution will be wholly and exclusively for the purposes of the trade if the contribution paid in respect of a controlling director or a connected employee is in line with a contribution that would have been made for an unconnected employee in a similar situation.
General guidance on employer’s contributions to a registered pension scheme is set out in the Business Income Manual at BIM46000.
An inspector who is considering a review or challenge of an employer deduction should follow the guidance at BIM46001.