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HMRC internal manual

Business Income Manual

Specific deductions: pension schemes: wholly & exclusively: introduction


S34(1) Income Tax (Trading and Other Income) Act 2005, S54(1) Corporation Tax Act 2009

In deciding whether a contribution to a registered pension scheme is allowable, the same rules apply as for any other expense (with the exceptions of whether a payment is capital and the timing of the deduction - see BIM46010). In particular, any contribution must be paid wholly and exclusively for the purposes of the trade for it to be deductible.

The principles underlying the ‘wholly and exclusively’ test are long established and apply equally to pension contributions as to any other trading expense. More detailed guidance on the test is at BIM37000 onwards. However, it is important to emphasise that as part of the cost of employing staff, pension contributions are likely to be allowable, including the situation where one party makes a contribution on behalf of another.

There are specific and unique issues to be aware of in considering how the wholly and exclusively principle applies to pension contributions met or guaranteed by one company on behalf of another, either by another sponsoring employer of a multi-employer scheme or by an unrelated third party.

The damage for a company seen to be abandoning the scheme members and pensioners related to it or its associates can be immeasurably greater than for a company failing to pay off a supplier or a landlord, both in terms of its public face and the morale of its employees. Often there is a much more significant business driver to make a pension contribution to a scheme in deficit than for other types of cost. In almost all cases this will be the sole trade purpose behind one company paying a contribution towards an underfunded pension scheme liability relating to another company and a deduction will be due. Further guidance is at BIM46065.

It will be relatively rare in the context of pension contributions to have to consider whether there is a non-trade purpose for the employer’s decision to make the contribution. The guidance that follows considers circumstances in more detail where there may be a non-trade purpose for contributions. However, when considering this guidance it should be borne in mind that whatever the circumstance it will always be a question of fact as to whether there actually is a non-trade purpose for the contribution and that for the most part even in these circumstances the contribution will be wholly and exclusively for the purposes of the trade of the payer.

Specific issues

  • For contributions paid in respect of a controlling director or an employee who is a relative or close friend of the controlling director or proprietor of the business, see BIM46035.
  • For contributions made as part of the arrangements for going out of business, in particular where there is no pre-existing contractual obligation to make such a contribution, see BIM38310 and BIM46040.
  • Where a contribution is required to be made pursuant to S75 Pensions Act 1995 (including multi-employer withdrawal arrangements), see BIM46045.
  • Where following the issue of a notice by the Pensions Regulator, a person is required to pay a pension contribution, see BIM46050.
  • Where a contribution is in respect of orphaned liabilities, see BIM46055.
  • For contributions made as part of the bargain struck for the purposes of facilitating the sale of shares in a subsidiary, see BIM38340 and BIM46060.
  • For contributions made in connection with the pension deficit of another company’s trade where the reputation of the payer’s trade or the morale of its staff is not the sole purpose behind the contribution, see BIM38250 and BIM46065.