RPSM05102010 - Technical Pages: Contributions and tax relief: Employer contributions: Entitlement to tax relief

Entitlement to tax relief

Tax relief on employer contributions to a registered pension scheme is given by allowing contributions to be deducted as an expense in computing the profits of a trade, profession or investment business, and so reducing the amount of an employer’s taxable profit.

In the case of a trade or profession, employer contributions will be deductible as an expense provided that they are incurred wholly and exclusively for the purposes of the employer’s trade or profession ICTA\S74(1)(a) – corporation tax and ITTOIA\S34 - income tax. Where the employer is a company with investment business the employer contributions will be deductible as an expense of management ICTA\S75.

The pension tax legislation amends the normal rules as to what is an allowable deduction and as to the timing of a deduction. The details of these amendments can be found on RPSM05102020. But briefly the 2 main points are

• pension contributions are not treated as capital payments if they otherwise would be, and
• a deduction can only be given for the period in which the contribution is paid.

The HMRC officer dealing with the Income Tax/Corporation Tax return of the employer will consider questions as to whether the contribution is an allowable expense. More specific guidance about whether contributions to registered pension schemes are an allowable expense is in the Business Income Manual at BIM 46001.

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 RPSM05102160, and
• contributions paid in respect of members who are controlling directors or are connected to a controlling director – see RPSM05102170.

In order to prevent avoidance of the spreading rules, see RPSM05102060, certain payments by a employer are treated for spreading purposes as if they are contributions to a registered pension scheme. For more details see page RPSM05102025.

Tax relief can only be given when a contribution has been paid

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 obligations in respect 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.

There are transitional provisions for some employers who received tax relief before 6 April 2006 for a contribution actually paid after 5 April 2006 – see RPSM05102150.

Tax relief on large contributions may be spread forward into future tax years – see RPSM05102060 to RPSM05102130.

Further Guidance - Trading Employer's

Detailed guidance on the deduction in computing trading profits for employer's contributions to a registered pension scheme can be found in the Business Income Manual at BIM 46000 onwards.

Further Guidance - Investment Companies

Detailed guidance on the deduction in computing profits for employer's contributions to a registered pension scheme by an Investment Company is in the Company Taxation Manual at CTM08340 onwards.