Employer contributions and tax relief
How much can an employer pay into a pension plan?
- Employer contributions are not restricted, however they must satisfy the 'wholly and exclusively' requirement to receive tax relief.
- Employer contributions count towards the annual allowance.
- There are a number of scenarios when additional implications need to be considered.
In theory, an employer 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; employers 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 an employer contribution will receive tax relief or not.
For tax relief to be given on 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 profit and loss account of the employer and will subsequently result in the amount of an employer's profit being reduced.
In the case of a trade or profession, the employer contributions will be deductible as an expense provided they are incurred wholly and exclusively for the purposes of the employer'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 employer's trade. A contribution won't be allowable if there is an identifiable non-business purpose for the 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 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.
Ex-employees and non-employees
Employers and third-party contributions
One final point worth bearing in mind....
Remember, 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 can also normally only be 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).
- HMRC Pensions Tax Manual - PTM043000: tax relief for employers: contents (opens in a new window)
- HMRC Business Income Manual - BIM46000: Business income manual: pension schemes (opens in a new window)
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.