RPSM05102090 - Technical Pages: Contributions and tax relief: Employer contributions: Example to show if tax relief needs to be spread

Example to show if tax relief needs to be spread

F Bloggs Ltd pays pension contributions of

£3.75 million in the chargeable period ending 31 March 2007 (the previous chargeable period), and

£9 million in the chargeable period ending 31 March 2008 (the current chargeable period).

The company changed its accounting year in 2007 so that the previous chargeable period runs from 1 January 2006 to 31 March 2007.

Relief has been spread forward from a contribution made in the period ended 31 December 2005. The amount of spread forward relief allowable in the period ended 31 March 2007 is £450,000 and the amount of spread forward relief allowable in the chargeable period ended 31 March 2008 is £360,000.

In the current chargeable period year F Bloggs Ltd took over another business so has 150 new employees who became pension scheme members. The cost of providing these new members with benefits was £600,000. Another £500,000 was used to pay for cost of living increases to pensions.

Step 1 Contributions to be included in the current chargeable period are

£9 million – (£600,000 + £500,000) = £7.9 million.

The £360,000 of relief spread forward from 2005 does not count towards the contributions in the current chargeable period because it is not a contribution paid in the current period.

Step 2 The factor for the previous chargeable period is

So the contribution paid in the previous chargeable period is

0.8 x £3.75 million = £3 million

The £450,000 of relief spread forward from 2005 does not count towards the contributions in the previous chargeable period because it was not a contribution paid in that period.

Step 3 Contributions in the current chargeable period are £7.9 million

Contributions in the previous chargeable period were £3 million

So contributions in the current period are 263% of (or 2.63 times) the contributions paid in the previous period with the excess being

£7.9 million – (£3 million x 110%) = £4.6 million

Step 4 the excess contributions of £4.6 million are more than £500,000 so the tax relief on the contribution will be spread.