Andrew Tully, Standard Life
Pensions simplification has now been with us for just over one year. The original concept of a greatly simplified pension regime in the UK was a much needed and worthwhile goal. However the majority of the industry agrees that the outcome has not matched the original aim.
As we moved up to and beyond A-Day areas of complexity were added - tax on alternatively secured pensions, u-turns on residential property and pensions term assurance, and the horrendously complex tax-free cash recycling rules to name but a few.
The way in which an employer gets tax relief on their pension contributions also changed from A-Day.
Previously there was a general understanding that contributions within certain maximum levels would receive tax relief.
The abolition of the maximum contribution levels and their replacement by the much greater annual allowance necessitated a change in the Government's view.
So the 'wholly and exclusively' rules - widely used for other business expenses - now also cover employer pension contributions.
This change created uncertainty throughout last year. How much could an employer pay and receive tax relief? Was the £215,000 figure a mythical payment, which couldn't actually be reached?
The Government listened to the concerns of the industry and introduced some guiding principles in February. This helped by confirming that the vast majority of employer contributions will receive tax relief. But it left some question marks around contributions for directors and their relatives.
Following further discussions with the industry, we now have more guidance from HM Revenue & Customs (HMRC), which gives much greater clarity.
For controlling directors and owners, the updated guidance is very positive and suggests that pension contributions will rarely, if ever, be challenged. HMRC recognise controlling directors and owners are the driving force behind businesses and so generate much of the company's income.
In these cases tax relief should be given whatever the level of remuneration and irrespective of how it is split between pensions and salary.
For connected people such as a spouse or child, the guidance is clear on the principles that will apply. The key tests of the overall remuneration package will be whether it represents a fair commercial rate for the job being done and is in line with benefits given to any arms-length employees doing similar work.
Even if the payment fails these initial tests, any apparently excessive reward isn't automatically disallowed - there are still grounds on which it might be justified, such as payment flexibility to catch-up on previous pension shortfalls.
This automatically allows connected people comparable pension contributions to similar unconnected employees.
If there is no comparable employee, a contribution which aims to provide a reasonable benefit at retirement - for example a benefit equivalent to two-thirds of the salary for longer serving employees - is unlikely to give HMRC any cause for concern.
The position now is not perfect but it does give accountants a fair bit of room to manoeuvre, and is significantly clearer than one year ago.
Many of us, myself included, are quick to criticise the Government when they make mistakes. So it is only reasonable to give praise when significant steps are made to improve an unclear situation.
Most importantly, I hope it shows the Government that when they work with the industry, we can together improve and clarify rules while still taking into account genuine concerns of tax avoidance.
Marcus Brookes appointed CIO
In association with Professional Adviser
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