New guidance has been issued by HM Revenue & Customs to advise company directors on whether they will receive corporation tax relief on their pension contributions.

When the new pension rules came into effect in April 2006, HMRC's guidance was that pension contributions made by employers would only be allowable against corporation tax if they were "wholly and exclusively for the benefit of the trade". This broad requirement had a stifling effect on the level of contributions, as advisors were unsure what HMRC's measure of "benefit" extended to.

Fortunately, there has now been a welcome development from the HMRC as their interpretation is now clearer. The following telling paragraph recently appeared on the HMRC website:

"Controlling directors are often the driving force behind the company. Where the controlling director is also the person whose work generates the company's income then the level of the remuneration package is a commercial decision and it is unlikely that there will be a non-business purpose for the level of the remuneration package. It should be noted that remuneration does not include entitlement to dividends etc arising in the capacity of shareholder."

This appears to indicate that as the profits of the business are generated by a director of a company then any contribution up to the maximum annual allowance should be relievable, irrespective of the level of earned taxable income.

However, every case is different and a tax adviser would need to make the final judgement on behalf of their client.

For further information, contact Tony Medcalf, partner and head of tax at Moore and Smalley Chartered Accountants and Business Advisors, on 01772 821021.