Tax relief on company or employer pension contributions
In theory, an employer or company can pay any amount of pension contribution to a registered pension scheme in respect of one of their employees or an ex-employee, regardless of their salary.
The problem is tax relief is not automatic; they only receive corporation tax relief on their contributions if they are wholly and exclusively for the purpose of the trade or profession.
It is therefore not always possible to be sure in advance whether a contribution will receive tax relief or not.
For tax relief to be given on company or employer contributions, they need to be deducted as an expense in calculating the profits of a trade, profession or investment business. They should be included in the company's profit and loss account and will subsequently result in the company's profit being reduced.
In the case of a trade or profession, the contributions will be deductible as an expense provided they are incurred wholly and exclusively for the purposes of the company's trade or profession.
HMRC's view is that contributions to a registered pension scheme will normally be allowed and it would be 'relatively rare' for a pension contribution not to be for the purpose of the company or employer's trade. A contribution won't be allowable if there is an identifiable non-business purpose for the company or employer's decision to make the pension contribution or for the size of the contribution.
For further information HMRC has issued guidance on tax relief on employer contributions.
It's worth bearing in mind that company and employer contributions count towards the annual allowance, money purchase annual allowance and tapered annual allowance. More details of this can be found in our annual allowance, money purchase annual allowance and tapering of annual allowance articles.
And is it as simple as that?
Not quite. As you'd expect, there are a few scenarios when there may be some additional issues to consider with regards to employer contributions. Let's have a look at these.
Controlling directors
Controlling directors can control how much remuneration they take from the business and the proportion that is taken as salary, bonus, dividends and pension contributions. In particular, a controlling director may decide to take a small salary and the bulk of their remuneration as dividends for tax and National Insurance reasons. Does that mean they have restricted the scope for tax relievable employer contributions?
The short answer is no. As long as it can pass the 'wholly and exclusively' test, an employer contribution will benefit from corporate tax relief.
The first step for HMRC is to establish whether the level of the total remuneration package, so things like salary, bonuses, commission, benefits in kind and pension contributions is commercially reasonable for the work done. Where a controlling director is the driving force behind the company and whose work generates the company's income (for example, where the controlling director is the sole owner and employee), the level of the remuneration package is a commercial decision and is unlikely to fail the test. A large employer pension contribution (in comparison to salary) may therefore be able to be claimed as an expense of the company.
However, the employer's contribution is deducted from the employer's trading profits for tax purposes and can normally only be applied to the period of account in which it is paid.
Other employees
Where an employee is unconnected to the employer it is likely the remuneration package will be at a commercially reasonable level.
Where the employee is a non-controlling director or a friend or relative of a controlling director, HMRC may want to be satisfied the package is not unreasonable. If the package is in line with that paid to unconnected employees, it will normally be accepted as reasonable but if precise comparisons are not possible, HMRC will carefully consider the facts to establish whether the package is commensurate with the work done. If it appears the spouse or relative's package is actually part of the controlling director's own remuneration, the contribution may be taxable as earnings of the director, despite being wholly and exclusively for the purposes of the trade.
Ex-employees and non-employees
As we have seen, where an employer has committed to provide employees with a pension as part of their remuneration package, the costs of meeting the commitment are normally tax deductible as an expense of the trade.
This can apply even where the decision or need to make the pension contribution happens after:
- The employees retire or leave the employer's service.
- The employer ceases to trade.
- The employer sells the business in which the employees work.
The crucial point is whether the employer has agreed to make pension contributions as part of the employment package.
Employers and third-party contributions
An employer can only receive tax relief on a pension contribution if it's made on behalf of an employee (or in some circumstances an ex- employee).
A contribution can be made by a company on behalf of someone other than an employee (say the spouse or child of a controlling director) but such a contribution would be regarded as a third-party contribution. A third-party contribution is treated as if it had been made by the individual who would benefit from the relevant tax relief, as set out in pension contributions - all you need to know - the employer wouldn't be able to receive corporate tax relief.
