RPSM05102070 - Technical Pages: Contributions and tax relief: Employer contributions: When will tax relief be spread?

When will tax relief on employer contributions need to be spread?

Where an employer contributes to more than one registered pension scheme in the same chargeable period the spreading provisions apply separately to the respective contributions made to each registered pension scheme and not to the combined total of employer contributions made to all registered pension schemes in that chargeable period.

If there is a large increase in the level of employer contributions from one chargeable period to the next tax relief may be spread. Establishing if tax relief on an employer contribution to a registered pension scheme needs to be spread is a 4 stage process.

4. Establish what contributions have been paid in the current and previous chargeable period.
   
5. If there has been a change in the length of chargeable periods adjust the periods to the same length.
   
6. Compare the relevant contributions in the current and previous chargeable periods to work out if there has been an excess and if so how much.
   
7. Is the excess more than £500,000?

When carrying out these calculations it is the contributions actually paid in each chargeable period that should be used in the calculations. For instance, where relief has been spread forward into a chargeable period in respect of a contribution made in a previous chargeable period it is the amount of contribution paid in each period, rather than the relief given in each period, that is used when determining whether contributions in the current chargeable period need to spread. Similarly any provisions made under general accounting principles are ignored because they are not contributions paid.

Certain classes of contributions paid in the current chargeable period can be ignored in the calculation – this is explained in more detail in RPSM05102080 where the 4 stage process set out above is explained in more detail.

The legislation is written so that where no contribution was paid in the previous chargeable period, for example if an employer has only just set up a pension scheme, tax relief on contributions in the current chargeable period will not be spread.

Chargeable period means a period of account where a contribution relates to a trade or profession, and accounting period where it relates to an investment business or to the basic life assurance and general annuity business of a life insurance company.

Only tax relief on an ‘excess’ contribution of £500,000 or more will be spread. The length of time the tax relief will be spread over depends on the size of the excess – see RPSM05102100.

There are also provisions for when an employer ceases business and how this affects spreading of tax relief – see RPSM05102120.