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Company, employer contributions and tax relief

Published  13 April 2023
   6 min read

How much can a company or employer pay into a pension plan? 

Key facts

  • Company and employer contributions are not restricted, however they must satisfy the 'wholly and exclusively' requirement to receive tax relief.
  • Company and employer contributions count towards the annual allowance.
  • There are a number of scenarios when additional implications need to be considered.

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 allowancemoney 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 payment 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.

Some frequently asked questions

A. Tax relief can only be given on contributions that have actually been paid which can be substantially different from an amount in the profit and loss account showing an obligation in respect of defined benefit schemes. It is only the amount actually paid that can be considered for tax relief.

A contribution is normally only treated as a deduction for the accounting period in which the contribution is paid. It can't be carried forward or back to a different charging period. An exception to this is when a much larger than normal employer contribution is made.

Depending on the size of the contribution and how it compares with the employer's usual level of contribution, HMRC may require the tax relief to be spread over more than one period of account. For more details on tax relief and spreading, please see HMRC Pensions Tax Manual - PTM043400: tax relief for employers: spreading (opens in a new window).

A. An investment company, such as property company, can pay employer contributions. They’ll get corporation tax relief as an expense of management rather than as an expense of the business as it would if was a trading company.

A. A shareholder isn’t an employee. So, an employer can only make employer contributions for them if they’re also an employee (or ex-employee).

They could, in theory, make a third person contribution. But this would be treated the same as a personal contribution (tax relief limited to the higher of £3,600 or 100% of relevant UK earnings) and there wouldn’t be any corporation tax relief available.

A. Yes. Unlike personal contributions, there is no age restriction on employers paying contributions and still receive corporation tax relief.

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.