Tax Relief on a Large Employer Pension Contribution
The rules around corporation tax relief on a single large employer pension contribution are not easy, so this article looks at one of the examples from our R04 calculation workbook to shed some light on this subject.
THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2021/22.
Tax relief on a large employer contribution will be spread over a period of years if:
- it exceeds 210% of the contribution in the previous accounting period and
- the excess amount is £500,000 or more.
Example:
The rules around corporation tax relief on a single large employer pension contribution are not easy - here's a useful example. #CII #R04 Share on XUp Sticks Ltd has made an annual contribution of £2,200,000 this accounting period to its SSAS. This is an increase from £700,000 last accounting period and has been made in recognition of the members’ contribution towards the firm’s significant increase in profits.
Calculate how the contribution in the current accounting period will be treated for the purposes of tax relief, including the amount that will qualify for tax relief in the current accounting period.
The Steps to Work This Out:
1. Is the new contribution more than 210% of the previous one?
The contribution in the last accounting period was £700,000 and this year it has increased to £2,200,000.
Multiply the previous year’s contribution by 210% i.e. £700,000 x 210% = £1,470,000.
The new contribution of £2,200,000 is clearly more than £1,470,000.
2. Does the excess exceed £500,000?
The excess is defined as the amount of the new contribution less 110% times the previous one.
The new contribution is £2,200,000 and from this, we take £770,000 (i.e. 110% of £700,000).
This equals £1,430,000 which is over £500,000
As part one and part two have been satisfied, the tax relief will be spread and we need to refer to the ‘Spreading table’ (given in your R04 study text) which tells us over how many accounting periods the excess will be spread.
The table tells us that if the excess is above £1m but less than £2m as it is in this example, tax relief will be spread over 3 accounting periods i.e., £1,430,000 ÷ 3 = £476,667.
In the first year, the amount allowed for relief is £476,667 plus the figure of £770,000 which totals £1,246,667.
In the next two accounting periods, £476,667 will be given. Totalling, in the end, the contribution of £2,200,000.
This is a tough calculation, but it’s in the study text so it’s always a possibility it will be tested.
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