Contractors welcome 'A' Day clarification

Many Contractors will be familiar with the opportunities presented by the Pensions Simplification rules (known as 'A' Day) that came into effect last April. The new rules included the ability to make, in theory at least, unlimited company contributions into pensions within a personal lifetime allowance of £1.5 million.

This provided Contractors operating through one-man limited companies with a fantastic route for tax saving and strategic retirement planning had it not been for the caveat that pension contributions would only qualify for tax relief if they could meet a test that they were "wholly and exclusively" for the purpose of trade.

The final decision of whether or not to grant tax relief on contributions was left with the local inspector of taxes. This spelled disaster in terms of any effective contribution planning as there would be no hard and fast guarantee that tax relief would be awarded.

No advance approval was possible meaning that in many cases prudent accountants and financial advisers were forced to caution clients against making substantial contributions over and above the old pre 'A' day limits until the position had been clarified.

While many suggested that HMRC was making a huge saving in tax relief by dragging out any clarification for as long as possible, Contractors and their advisers were left with the frustration of not being able to take full advantage of new pensions rules that were fully available to other professions.

At long last...

HMRC have, this week, issued new guidance in the form of BIM46001. This confirms the payment of a pension contribution is part of the normal costs of employing staff. As a result the "wholly and exclusively" rules will generally only be considered in limited circumstances.

The guidance states that the contribution "will only be disallowable where there is an identifiable non-business purpose for the employer's decision to make the contribution to a registered scheme, or for the size of the contribution." Essentially, those who wish to make pension contributions for the genuine purpose of retirement planning should now be able to do so safe in the knowledge that they will receive tax relief.

There are still cases in which a guarantee of tax relief should not be assumed such as excessively large contributions in relation to the value of the individual in the business and it is recommended that Contractors seek professional advice where there is any doubt of whether the contribution would be viewed as excessive or unusual. With respect to HMRCs take on the application of the new rules they concede "It should be borne in mind that the significant increase in qualifying limits with effect from 6 April 2006 will in itself facilitate and encourage an increase in contributions over earlier periods." (BIM46035).

Confidence when planning for the future
In reality a Contractor working through his or her one-man limited company should now have very little to fear and will be able to fully exploit the massive tax saving possibilities available. There is now far greater flexibility as to how and when pension benefits may ultimately be taken. These factors combine to make pension investment a far more attractive prospect than ever before.

Composites are dead, long live the PSC pension
Given the various challenges that composite companies and MSCs look to face after 6th April, these new pension opportunities couldn't have come at a better time. The likelihood of thousands of Contractors converting back to Personal Service Companies, coinciding with almost unlimited company pension contributions could well represent the most tax efficient method of transferring substantial funds from contract and into personal hands.

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