Last chance to make decent pension contributions
Originally sent: January 27, 2006We now have the long awaited Revenue guidance on deductibility (or perhaps we should say ?non deductibility?!) of pension contributions post A Day.
If you would like to read the guidance firsthand, it is BIM46001, which can be found at http://www.hmrc.gov.uk/practitioners/registered-pensions.htm. It does not make pleasant reading.
Pensions contributions by employers on behalf of controlling directors or their friends or relatives will not be deductible against corporation tax unless the local inspector is satisfied they are for the purpose of the business. This, of course, is the rule that applies to any other business expense, and we were expecting such an announcement ? but it is certainly a step backwards from the current regime.
Local inspectors have been told to compare whatever is paid into the pension with what either is or would be paid into pensions for ordinary employees doing similar work. If it is significantly greater, then it will be considered as being for the benefit of the individual rather than for the benefit of the business, and will therefore not be allowable. They have also been told to look carefully at the amount of salary a director is paid. If that salary is either higher or lower than might be considered reasonable for the work done, the Inspector can take that as evidence that the pension payment is not entirely for the purpose of the business.
This last point is especially worrying. It seems to allow the Revenue to challenge virtually any pension contribution by asserting the individual is not being paid an ?appropriate? salary ? whatever that might mean!
I would suggest that all of the above is going to make it very difficult to continue using approved pensions either as a pure tax planning vehicle or as a tax-efficient means of extracting profits from a company.
Now would be a very good time to review your clients? pension arrangements and get them to make maximum allowable contributions, changing the company year end if necessary. If they do not do this now, they may never have the opportunity again. And guess who they will level the complaint at if this is pointed out to them a year or two from now by another IFA?
In order to succeed in today?s world, you need to stay ahead of the pack. If you want to ensure your practice stays out ahead, give one of our team a bell and find out how we may be able to assist you.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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