A Day - new pension rules

17 March 2006:

A new pensions regime is coming into force on 6 April 2006. The eight sets of rules covering pensions in the UK will be replaced by a single set.

There are a number of government sites on pensions, including Directgov [http://www.directgov.uk/moneytaxandbenefits/pensionandretirement/fs/en], which has information on state, company and personal schemes. The Pensions Service [http://www.thepensionservice.gov.uk] have some downloads, including a section for employers and help to employees to forecast their pensions.

A tax expert has warned that the whole area of pension contributions could become a minefield for small companies following the publication of draft internal guidelines by HM Revenue and Customs (HMRC) [http://www.hmrc.gov.uk]

These guidelines encourage tax inspectors to establish whether or not an employee is a "close friend" of the controlling director of a firm before allowing tax relief for pensions contributions made in respect of an employee, accountants and businesses advisers PKF have warned.

Under current tax rules, it is relatively straightforward for businesses to claim a tax deduction from their profits in respect of pension contributions made for employees. For accounting periods ending after 5 April 2006, this expense will only be deducted if the business can demonstrate that it is incurred "wholly and exclusively" for a business purpose such as attracting and retaining valued employees.

The proposed rules require tax inspectors to establish whether or not a pension contribution is paid for a non-trade purpose, that is whether it benefits the employee more than the business.

Provided the total cost of the salary package reflects the individual's value to the company, it should not matter to the company if senior employees choose to be rewarded by means of pension contributions rather than salary.