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Will A-Day guidance bring size of relief?

As A-Day approaches, some very important tax issues are suddenly coming to the fore. The main thrust of this art- icle is to consider the deductibility of employer contributions to pension arrangements under the new regime.

Currently, section 592(4) Income and Corporation Taxes Act 1988 means that, provided all relevant limits are adhered to, company contributions to pension arrangements, even in respect of controlling directors, are automatically deduct- ible when computing profits liable to corporation tax.

Under the new regime, there are no specific limits on contributions and an employer can in theory pay a contribution of any amount in respect of a scheme member. In practice, any such contribution is unlikely to exceed 215,000 in 2006/07 as to do so would result in the member paying an annual allowance charge on the excess.

The Revenue has indicated that tax relief will depend on whether an employer contribution is deemed as being paid wholly and exclusively for the benefit of the trade (section 74 ICTA 1988). No guidelines have yet been published on what contributions are likely to be relievable under this provision but the decision is likely to be made by the local Inspector of Taxes, who will be given guidance in this area before the new regime is introduced.

Allowability of relief on employer contributions is particularly relevant where controlling directors are concerned. For example, if a controlling director were taking his remuneration in the form of a relatively small salary together with a sizeable dividend, would the Revenue grant tax relief on a big employer contribution?

My former colleague Brian Lawless wrote to the Revenue earlier this year seeking guidance and the Revenue’s answer to one of his questions was somewhat concerning. He envisaged a situation where a shareholder wished to dispose of his shares in a private trading company. In the same period, the shareholder also wished to vest his pension benefits. To reduce the amount of cash in the company, a pen- sion contribution of 500,000 was to be made. The shareholder’s salary for the period was 50,000. Would the whole contribution be deductible for corporation tax purposes?

The Revenue’s view is that the question of what is allowable will depend on the facts of each case. For example, where companies are making contributions for controlling directors or members of a fam- ily that controls the company, the employer’s contribution will be wholly and exclusively for the trade if it is in line with a contribution that would have been made to fund the pension provision of a third-party employee if that employee was in a similar situation to the connected employee.

This clearly throws doubt on the extent to which tax relief will be granted on an employer contribution for a shareholding director.

The Revenue’s Pension Simplification Newsletter 1 promised to provide guidance on tax issues by September. This is needed urgently and must be clear and precise.

Controlling directors and shareholders will need advice in respect of pension planning before April 6, 2006. If tax-deductible contributions by employers in respect of their shareholding directors are likely to be restricted under the new regime, it may be more attractive to recommend that company contributions are maximised prior to A-Day where it is known that tax relief will be granted, provided that such contributions do not result in the director’s benefits exceeding the maximum approvable benefits.


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I have a confession to make and would be grateful if readers would keep it a secret from my employer and my wife. As someone who has been reputed to know a reasonable amount (for a journalist) about personal finance, the information contained here could be highly damaging to that reputation.

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