Dear Rebecca,
You’re correct that a personal contribution made by your husband would not benefit from tax relief now that he’s over 75, even though he still has relevant UK earnings. It’s why many pension schemes do not accept personal contributions after that age.
Thankfully, there are no such restrictions on employer contributions for over-75s who are still employed. However, an employer will only benefit from full tax relief on what they pay in if the contribution is not deemed excessive for the type of role and work done. An employer contribution has no limit in theory, but for a trading company to be able to treat it as an allowable deduction for corporation tax, it needs to satisfy the wholly and exclusively test.
This means the contribution needs to be part of a package that is reasonable for the work the individual carries out. Directors and family members might fall under greater scrutiny than unconnected employees, but if an individual adds significant value to a business, then there’s usually no issue with a pension contribution being in excess of the amount of salary they are paid.
It’s the whole remuneration package that is considered, if the HMRC inspectors are thinking about restricting the tax relief at all.
Investment companies (as with trading companies) can also make employer pension contributions for key employees and/or controlling directors and get tax relief. In this case, it would be treated as an expense of management. But the tests are largely the same.
Although there is no limit on tax relief for employer contributions, the annual allowance will still apply for them. The allowance is £60,000 per tax year for most people, although you can carry forward unused allowance from previous years. It sounds like you’ve considered this as you’ve mentioned making use of the carry forward rules.
This means that if a large employer contribution was made which resulted in the employee exceeding their available annual allowance, it could result in a tax charge for the employee personally (even though the employer could still get full tax relief).
Recycling rules
Now, to the recycling rules.
The assessment can catch large contributions either side of a new tax-free cash payment for a pension saver but crucially, there must also be a pre-planned intention to recycle the tax-free cash back into their pension.
My view – based on the contents of your letter – is that the contribution can be argued not to have been made with the pre-planned intention to recycle tax-free cash for several reasons:
- The increased contribution was paid into your husband’s Sipp by his employer, as an alternative to leaving the excess cash in the business. This is fairly standard practice, especially in years of larger-than-usual profits.
- You’ve mentioned that you were not considering accessing the pension at the time of the contribution due to your other income covering your expenditure comfortably.
- You’ve only considered bringing forward the tax-free lump sum because you’re worried about rumoured changes in the Budget, rather than to replenish your own cash reserves after the contribution.
Taking a tax-free lump sum after 75 is not unusual as part of wider retirement planning.