HM Revenue & Customs has confirmed that employers’ pension contributions qualify as a normal business expense, meaning the majority will qualify for tax relief.
Its latest guidance governs when employers receive tax relief on contributions to registered pension schemes.
Under A-Day rules, HMRC said employer pension contributions would only receive corporation tax relief if they were “wholly and exclusively” for the purposes of the business.
This led to concerns that it might be difficult for employers in some situations to pass the “wholly and exclusively test”.
HMRC has confirmed that a contribution or part of a contribution will not receive tax relief only where there is an identifiable non-business purpose for the employer’s decision to make the contribution to a registered scheme or for the size of the contribution.
This could include when an employer contribution is paid in respect of a controlling director or employee who is a relative or close friend of the proprietor or controlling director.
The guidance says local inspector should look for specific evidence that the contribution is purely business related, including whether the level of remuneration reflects the value of the work undertaken by the individual for the employer.
Standard Life marketing technical manager Andy Tully says: “This guidance allows employers and their advisers to plan pension contributions with more confidence. It is clear from the Revenue’s guidance that the vast majority of pension contributions will receive full tax relief.”