BIM46192 - Specific deductions: pension schemes: pre April 2006: exempt approved schemes

A scheme that meets the conditions in ICTA88/S590 will be an approved scheme. It will be an exempt approved scheme if it meets further conditions in ICTA88/S592. An exempt approved scheme is defined at ICTA88/S592 (1) as:

• an approved scheme which is shown to the satisfaction of HMRC to be established under irrevocable trusts, or
• any other approved scheme which HMRC, having regard to any special circumstances, directs shall be an exempt approved scheme.

Exempt approval brings a number of tax advantages, notably:

• all the employer’s contributions are tax deductible (ICTA88/S592 (4) and (6)),
• employees’ contributions are tax deductible up to certain percentage limits of salary (ICTA88/S592 (7)),
• the employer’s contributions are not employment income of the employees (ITEPA03 Part 6 Chapter 1).

Employers’ contributions to exempt approved schemes

Employers’ contributions to exempt approved schemes are deductible in computing the employer’s trading profits by virtue of specific legislation in ICTA88/S592 (4). This overrides the normal rules for deductions in ICTA88/S74 – corporation tax and ITTOIA05/S34 – income tax.

Ordinary annual contributions are deductible in computing the profits of the period in which the employer pays them. This was made clear by FA93/S112. Provisions for such contributions are therefore disallowed for tax purposes.

Deductions for special contributions (those which are not ordinary annual contributions) are spread as HMRC thinks proper. HMRC powers in this respect are delegated to Capital and Savings, Pension Schemes Office.

Further guidance on exempt approved schemes is in the Pension Scheme Instructions (PSI) manual.

Centralised schemes

Exempt approved schemes may include schemes in which more than one employer participates. These are known as centralised schemes.

Most centralised schemes are for employees of associated companies. But centralised schemes can also be set up for non-associated employers, for example employers in a particular industry such as the construction industry. Some industry schemes are local or regional; others are national. They are normally sponsored by a professional or trade association or trade union.