Wholly and exclusively. Sounds more like part of a marriage pledge than something to do with pensions tax relief. Yet these three words have already created more heartache than a thousand divorces.
From last April, the way in which employers get tax relief on their pension contributions changed. Up until then, pension contributions (within allowed limits) would generally qualify for tax relief. But the A-Day abolition of the maximum contribution limits predicated a change in the Government’s view.
The result was the application of ‘wholly and exclusively’ rules, widely used for other business expenses, to employer pension contributions. This change created uncertainty throughout last year. How much could an employer contribute and receive tax relief? What about employed spouses?
In response to concerns, the Government introduced some basic guiding principles in February this year. This helped confirm that the vast majority of employer contributions would still receive tax relief. But it still left some question marks over contributions for directors and relatives employed in the same business.
Following further discussions with the industry, HMRC published more guidance. For controlling directors, the updated guidance is very positive and suggests that the Revenue will rarely, if ever, challenge the amount paid/relief claimed. HMRC recognise controlling directors are the driving force behind businesses and so generate much of the company's income.
These principles will apply whatever the level of remuneration and irrespective of the split between pensions and salary. The implication is that the only limiting factor of the overall tax-relievable remuneration package is the amount of the company’s profit.
For those connected to a controlling director, such as a spouse or child, the guidance is also clear on the principles that will apply. The key test is whether the overall remuneration package represents a fair commercial rate for the job. In other words, is it in line with benefits given to non-family employees doing similar work?
Even if the contribution fails these initial tests, there are possible grounds for appeal. For example, excessive contributions might still be justified in order to catch-up on previous pension shortfalls. The rules allow connected people comparable pension contributions to similar unconnected employees working for the same firm.
If there is no comparable employee working for the business, a contribution that aims to provide a reasonable benefit at retirement – for example a benefit equivalent to two-thirds of salary for longer serving employees – is unlikely to give the Revenue any cause for concern.
The position now is still not completely black-and-white but it is as close as we are going to get. Most importantly, it gives accountants enough certainty to work with.
HMRC has received a lot of stick over the last year, mainly from the misguided decisions of politicians rather than its own actions. It is only right that we praise HMRC for now delivering some clarity where before there was none.
John Lawson is head of pensions policy at Standard Life.
The views expressed are those of the author and not those of the company he represents.IFAonline
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