Company pension contributions - Employer Pension Schemes: changing, complex, current (February 2008)
Employer Pension Schemes: changing, complex, current A-Day, 6 April 2006, ushered in the biggest shake-up of UK pensions in more than a decade. This affected not only personal pensions but also company pension schemes, with major changes coming into force for accounting periods ending after 31 March 2006. Many companies with a 31 March 2007 accounting date will shortly be filing their accounts and preparing their tax returns.
The aim of this Baker Tilly Tax Briefing is to alert businesses to the urgency of the associated accounting tasks, and to outline some of the complexity involved.
A-Day saw a welcome rationalisation of the myriad different types of company pension schemes, but brought with it significantly different rules. It set a limit on the contributions that could be made in respect of each employee, and required contributions to be made ‘wholly and exclusively’ for the purpose of the business.
The ‘wholly and exclusively’ restriction is only likely to be a problem where there is a relationship between the employer and employee – such as where the employee is connected with the controlling shareholders.
Tax relief on ‘excessive’ contributions must be spread
The figure of pension contributions which has to be reported in the accounts of the employer company may be different from the amount actually paid in the accounting period.
It is important to note that businesses get tax relief on the amount contributed, not on the accounts figures. This relief may be limited. If the contributions are ‘excessive,’ then the relief may need to be spread across a number of years.
What is deemed ‘normal’ will vary and the calculation of how to spread the relief can be complex. Once computed, the amount to be spread is fixed unless the business comes to an end.
If the business comes to an end before tax relief has been obtained for pension contributions that have been spread forward, alternative methods are used for obtaining effective relief.
In conclusion, the A-Day changes make for complicated tax accounting for company pension contributions. With company tax returns due for filing now, please get in touch with your usual Baker Tilly contact if you need more guidance, or telephone your local Baker Tilly office.
© 2008 Baker Tilly UK Group LLP, all rights reserved, 01/08
This technical briefing is designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this briefing may not be comprehensive and recipients should not act upon it without seeking professional advice from their usual professional adviser.
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