Income Tax (Trading and Other Income) Act 2005 section 38

Restriction of deductions

Section 38 restricts the timing and conditions under which an employer can claim a tax deduction for employee benefit contributions when calculating trading profits for income tax purposes.

• A deduction for employee benefit contributions is only allowed if qualifying benefits are provided, or qualifying expenses paid, from those contributions during the accounting period or within nine months of its end — and no deduction is available for contributions relating to an accounting period starting more than five years after the period in which they were made.
• Where qualifying benefits give rise to both an employment income tax charge and a National Insurance contributions charge, the deduction is only allowed if those tax charges are actually paid (and not repaid) within twelve months of the end of the accounting period in which the deduction would otherwise arise.
• If a deduction is initially disallowed, it may be claimed in a later period once qualifying benefits are provided or the relevant tax charges are paid — subject to the same five-year and tax payment conditions.
• The rules do not apply to certain categories of payment, including consideration for goods or services in the course of a trade, contributions to registered pension schemes, contributions to qualifying overseas pension schemes for relevant migrant members, or contributions to accident benefit schemes.