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HMRC internal manual

Business Income Manual

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Specific deductions: pension schemes: overview

S196 Finance Act 2004

Tax relief on an employer’s contribution to a registered pension scheme is given in accordance with the normal tax rules for the deductibility of the expenses of a trade, subject to the exceptions outlined below. For guidance on the meaning of employer for these purposes see BIM46015.

The legislation governing deductions for an employer’s contribution to a registered pension scheme provides for two departures from the normal rules for the deductibility of the expenses of a trade or profession:

  • Contributions are treated as not being capital payments if they otherwise would be, see BIM46025.
  • The timing of the deduction for a contribution does not follow its accounting treatment. Relief for a contribution is given for the accounting period in which it is paid and not in the period(s) it is recognised in the accounts. This is subject to spreading rules. Further detail is at BIM46010.

All other rules and case law applies to determine the deductibility of contributions, in particular any contribution must be paid wholly and exclusively for the purposes of the trade for it to be deductible (see BIM37000 onwards).

However, it is likely that you will need to consider the ‘wholly and exclusively’ rule only in the limited circumstances outlined in BIM46030. A pension payment by an employer is normally wholly and exclusively for the purposes of its trade even when the employees in respect of which the contribution is being made are retired or those of another employer. See BIM46065 for further details.

If, having obtained the facts and considered the guidance, you consider that a contribution was not or may not have been made wholly and exclusively for the purposes of their trade, you should first make a report to Specialist PT (Pension Scheme Services - Technical), at Fitz Roy House, Castle Meadow Road, Nottingham, NG2 1BG before challenging the deduction.

There are anti-avoidance provisions which restrict or deny a deduction for contributions in certain cases. See BIM46150.