Q: My client and his wife are the shareholders and directors of a company. The company has a large amount of reserves and is considering making a substantial contribution to the company pension scheme for each of them on the assumption it is an allowable deduction for corporation tax purposes.
A: Where an owner-managed company sets up a registered pension scheme, a review of whether or not any contributions should be made to the plan should form part of the year-end planning for the individual while taking into account any tax implications for the company.
A pension contribution by an employer to a registered pension scheme in respect of any director – or employee – will be an allowable expense for corporation tax unless there is a non-trade purpose for the payment. In cases where the contribution is part of the remuneration package received by the director, paid wholly and exclusively for the purposes of the trade, then the contribution is an allowable expense. In this regard, Revenue & Customs are likely to look closely at contributions made in respect of a director of a close company or where the employee is a close relative or friend.
One situation where all or part of the contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by the director or employee. In this type of situation, consideration should then be given as to whether or not the amount of the overall remuneration package – that is, the combined salary, benefits and pension contributions, not just the level of pension contribution – was paid wholly and exclusively for the purposes of the company’s trade.
Contributions where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director is comparable to that paid to ‘unconnected’ employees who perform duties of a similar value are acceptable as being wholly and exclusively for the purposes of the trade.
Regardless of whether or not the contribution is an allowable expense for corporation tax, it should be remembered that a pension contribution is not treated as a benefit-in-kind and therefore the level of contribution made to the pension scheme is not subject to income tax. In addition, the individual will not receive any tax relief on the contribution made as it is an employer and not a personal contribution. Also, depending on the level of contribution, the individual may incur an annual allowance charge as employer contributions are taken into account, as well as personal contributions, in this respect.
Ben Chaplin is managing director of Taxwise
