HM Revenue and Customs has published further guidance clarifying A-Day changes on tax relief for employer contributions by owners and controlling directors of companies.
Following A-Day HMRC stated any employer pension contribution would only receive corporation tax relief if it is ‘wholly and exclusively’ for the purposes of the business, which at the time caused some confusion among both the industry and local inspectors of taxes.
However, in February HMRC published additional guidance on this issue which confirmed the ‘wholly and exclusively’ test would only apply in limited circumstances as the payment of a pension contribution is part of the normal costs of employing staff.
Now the Revenue has responded to calls for more clarification on how the new rules affect controlling directors and business owners by adding new guidance to the Business Income Manual.
And it confirms if a controlling director or owner takes a remuneration package up to the level of company profits, this should be acceptable as the profit reflects the value added by that individual. In addition the remuneration package can be any combination of pension or salary.
Andrew Tully, marketing technical manager at Standard Life, says this clarification is good news for owners of companies and their advisers, as controlling directors and owners are usually the driving force behind the company and so generate much of the company's income.
He adds: “In these cases the Revenue confirm it is very likely tax relief will be given. For connected people such as spouses, pension contributions comparable with unconnected employees is acceptable. But if there is no comparable employee, a contribution which aims to provide a reasonable benefit at retirement - such as a benefit equivalent to two-thirds of salary - shouldn't give the Revenue any cause for concern."
Rachel Vahey, head of pensions development at Aegon Scottish Equitable, also welcomed the guidance although she highlighted how difficult it could be to compare a connected person’s contribution, including those made by a wife or husband, to a third person.
However, she adds: “It is excellent news that the Revenue has given us so much more clarity on the issue of controlling directors, and to see they have recognised how their businesses work and how the remuneration packages are put together.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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