Is pension advice tax free?
Posted on: 25-04-2023
Is pension advice tax free?
Some of your company’s directors are considering retiring in the next few years and each wants advice about funding their pensions. Can the company pay for the advice and treat it as a tax-free benefit in kind?
Employers can pay up to £500 per person per tax year for advice for their employees (including directors) about their pension contributions and pension savings without it counting as a taxable benefit in kind. There are two main conditions which must be met for the exemption to apply.
Condition A. The benefit must be offered to all staff. You can’t choose which employees to offer it to. If you offer it only to, say, directors and senior managers the exemption won’t apply unless condition B is met.
The restriction doesn’t apply if you offer to pay for pensions advice for employees at one or more specific locations. For example, if your business has more than one premises you can limit the perk to, say, all the employees at just one. However, there’s an alternative way of limiting the benefit to directors.
Condition B. The exemption can apply if you offer to pay for pensions advice to employees on grounds of their age (they must meet the required age for taking pension benefits from a registered pension scheme, currently 55) or because of ill health.
Neither condition requires that all employees accept the benefit you offer. As long as you have offered it to all employees (or all those employees who meet the age or ill-health requirement) the exemption applies to thoese who take advantage of it.
Remember that it’s an annual exemption of £500. If the advice spans more than one tax year ask the advisor to bill for their work each year so the exemption can be used.
Example. Ali works for Acom and starts receiving pensions advice that meets the conditions for the exemption in January 2024, i.e. in 2023/24. The advice is ongoing so that the total value of the advice is £900 by May 2024, i.e. 2024/25. To use the exemption efficiently Acom should ask the advisor to send a bill when the value of advice reaches £500 or by the 5 April if that’s sooner. If the bill is not sent until May 2024 and is for £900, HMRC may argue that only the exemption for 2024/25 applies so the balance of £400 is taxable.
Unlike most other benefits in kind you can pay for pensions advice for your employees as part of a salary sacrifice (optional remuneration) arrangement without the income tax or NI exemption being lost.
The answer to the question posed at the start of this article seems to be no, unless condition B applies to a director. However, if the directors are employed by a separate company from its general employees the exemption is possible.
Example. Acom (Holdings) Ltd (AH) is the parent company of Acom Ltd. Each company has the same directors. The employees are paid from the trading company (AL) but the directors are paid from AH. While perhaps not in the spirit of the exemption it’s possible for AH to make use of it for the directors only by offering it to all employees, i.e. the directors, of AH.
If you would like any assistance with any of these points.