Welcome to a new feature in Standard Life's adviser ezines - the askTECH Q&A.
In each edition, we will look at the most popular queries being submitted by advisers to Standard Life's askTECH knowledgebase.
askTECH allows you to enter your technical questions, and then (where available) provides you with the answer. The system is regularly updated with new questions and answers, and as it's online you can access it whenever you want.
The content covers the following categories - Pensions, Tax & Legal, Estate Planning, Investment, and Protection.
Below you will find the current top three pension related queries received from advisers:
Question 1
What is the maximum contribution an employer can make into a registered pension scheme?
Employer contributions to a registered pension scheme are unlimited, but tax relief on such pension payments will be at the discretion of the inspector of taxes.
HMRC has now published an update to the Business Income Manual which gives guidance on what the local inspector of taxes will consider when deciding whether to allow a pension contribution as a deductible business expense. This guidance makes it clear that, a pension contribution will normally be considered as being made 'wholly and exclusively for the purpose of the trade' and will therefore qualify for tax relief.
Only where there is a clear non trade purpose may tax relief be restricted or not allowed. This is explained further in the guidance.
Although employer contributions are unlimited, if total payments above the annual allowance are made (inclusive of any other payments made by or on behalf of the individual), there will normally be a 40% tax charge on the individual - the annual allowance charge.
Question 2
Are there any special rules for employer pension contributions for directors or other connected parties?
Contributions made in respect of an employee or director, who is a close relative or friend of the business proprietor or controlling director, will be deemed allowable if the remuneration package is in line with that of unconnected employees carrying out a similar role. If there are no unconnected employees, then the remuneration package should be considered on a commercial basis and reflect duties undertaken.
HMRC want to see that there is "equal pay for equal value", therefore the amount of the contribution should not be determined by the relationship between the individual and the controlling director/proprietor, but be based on that individual's actual worth to the business.
So, the rules are similar to that of unconnected employees, it is just that there may be more scrutiny to make sure that contributions for connected parties are not disproportionate to the work undertaken.
Question 3
Can UK investment companies make employer contributions to registered pension schemes for their controlling directors as well as other employees?
UK investment companies can make employer contributions to registered pension schemes for controlling directors or employees in the same way as trading companies can, although tax relief will be given under ICTA88/S75 as an 'expense of management', rather than the 'wholly and exclusive provisions' applicable to trading companies.
Give askTECH a go
Keep an eye out for more popular askTECH queries in future ezines, and if you've not already tried out the knowledgebase, click here to give it a go.
Tax and legislation are liable to change. This information is based on Standard Life's current understanding of law and HM Revenue & Customs practice. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
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