RPSM05102080 - Technical Pages: Contributions and tax relief: Employer contributions: Steps to work out if tax relief needs to be spread

Steps in establishing if tax relief needs to be spread

Step 1 – what contributions have been paid in the current and previous chargeable period?

It is the contributions actually paid by the employer to a registered pension scheme in the current chargeable period that must be determined here. Any relief in respect of contributions made in a previous chargeable period that has been spread into the current chargeable period does not count as a contribution paid in the current chargeable period as the contribution was actually paid in a previous chargeable period. Similarly any provisions made in accordance with general accounting conventions are not relevant as they are not contributions paid.

Certain contributions do not need to be spread. These are contributions to pay for

• cost of living increases to pensions in payment to pensioner members, and
• benefits for future service for members joining the scheme in the current chargeable period.

These contributions can be excluded when working out how much has been paid in the current chargeable period for spreading purposes.

The contributions paid in the previous chargeable period are calculated on the same basis as the contributions paid in the current chargeable period except that any contributions within the classes of ‘certain contributions’ mentioned in the two bullet points above that were paid in the previous chargeable period are included in the contributions paid in the previous chargeable period.

Step 2 – adjust chargeable periods

This step only needs to be carried out if the length of the current and previous chargeable periods are not the same, i.e. there has been a change of accounting date. We do not expect this step to be carried out just because chargeable periods are different due to a leap year.

Where the lengths of the chargeable periods are different a factor is calculated for the previous chargeable period using the formula

DCCP/DPCP

Where DCCP = number of days in the current chargeable period, and

DPCP = number of days in the previous chargeable period.

This factor is then applied to the amount of contributions paid in the previous chargeable period.

Step 3 – is there an excess and how much?

Compare the amount of contributions paid in the current chargeable period as found from step 1 with the contributions paid in the previous chargeable period after making any adjustment under step 2.

If the amount in the current period is more than 210% of (or 2.1 times) the amount in the previous period, there is an excess that may need to be spread.

The amount of the excess is the amount of the contribution in the current chargeable period that is more than 110% of (or 1.1 times) the contributions paid in the previous period.

Step 4 – is the excess more than £500,000?

If the amount of the excess is £500,000 or more tax relief on the contribution will be spread.

See RPSM05102090 for an example.