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IT contractor pension tax relief rules

Published on Feb 20, 2007 |

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The saga over allowable tax relief on employer contributions now looks to have reached a happy conclusion after last weeks clarification from the pension authorities.

Prior to the introduction of Pensions Simplification known as 'A' day, pensions contributions were limited to age-relate allowances and the entire regime represented a very rigid manner of investing for retirement. The new rules allowed investors much more freedom in terms of contribution levels, and how benefits were ultimately taken but Contractors operating through limited companies were unable to fully exploit the new rules when making company sponsored payments due to unclear guidelines on the tax relief available.

HMRC have now revealed that the 'wholly & exclusively' rule that looked likely to restrict employer pension contributions will now only be applied in limited circumstances.

The rules

The guidance published as part of the Pensions Simplification rules which came into effect last April stated that pension contributions would only qualify for tax relief if they were "wholly and exclusively" for the purpose of trade. This cast a shadow of doubt over what Contractors could reasonably class as "wholly and exclusively".

In addition, the new rules also stated that the final decision of whether a company funded contribution was eligible for tax relief fell to the individual's local inspectors of taxes.

This meant that tax relief on the contributions was never guaranteed and investors were forced to "play it safe" and limit any contribution to the pre-'A' day age-related allowances.

Contractors and their advisers were left in limbo; the former unable to take advantage of the new pension rules and the latter forced to recommend caution until clear guidance had been issued.

Clarification

After 10 months of delay it now seems that HMRC have accepted that employer contributions by Contractor's one-man limited companies should be universally eligible for tax relief. This means that, unless you are planning on contributing very large amounts which are out of character with your business you can be safe in the knowledge that your contributions will be awarded the hugely lucrative tax relief associated with pensions.

BIM46001 officially states that any contribution "will only be disallowable where there is an identifiable non-business purpose for the employer's decision to make the contribution to a registered scheme, or for the size of the contribution".

Despite a bad press over the years, pensions offer a fantastic opportunity to transfer funds from contract to personal hands. The additional freedom allowed now regarding how and when benefits can be taken, mean that this traditional method of saving for retirement is now more flexible than ever. Pension schemes need no longer feature set up fees of any sort and running are now, thankfully, low. The tax relief available could be as much as 48% and, in an industry where tax breaks are becoming rarer and rarer Contractors should take full advantage of any opportunities still remaining.

IT Contractor Pensions

To find out more about pensions for IT Contractors, and to enquire online - try out our IT Contractor Pension page.

Article written by Tony Harris.