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Employer contributions

This article covers the impact that employer contributions will have in relation to the pension changes introduced from 6 April 2011.


Pension tax legislation defines the only two types of pension contribution (excluding rebates) that can be paid to a registered pension scheme as personal contributions (which will include third party payments) and employer contributions.

Employer contributions are, on the face of it, straightforward. However, there are potentially more complex issues related to things such as:

  • the amount of the contribution that can be made,
  • who the contribution can be made for
  • the tax relief and liability issues.

Many of these issues are interlinked by the legislation and this article looks at some of the more common questions that may occur and the main areas regularly discussed.

It covers the main points of the topic and consequently needs to be viewed as only a guide. There may be further details that may affect funding decisions but occur infrequently.

What is the maximum payment that an employer can pay for an employee?

There is no defined maximum contribution an employer can pay. As long as it can be reasonably proved the contribution is ‘wholly and exclusively’ for the purposes of the UK business, the tax relief is not restricted on the contribution an employer makes on behalf of the employee.

Any contribution made over the annual allowance will create an annual allowance charge which will subject the member to a tax charge. This charge will be levied on the member and will be at a rate commensurate with the highest rate(s) of income tax the client pays. This can cause potential problems for the member as the contribution that has been paid is a legitimate contribution and cannot be refunded, so the member will have to find the money for the charge. Clauses in the Finance Act 2011 require scheme administrators to provide a service, whereby for tax charges in excess of £2,000 a member can request that benefits under the scheme be reduced to meet the tax liability.

The only exceptions to an annual allowance charge being applied are where a member dies or retires early due to severe ill-health.

What is a ‘reasonable’ amount to pay for an employer or a director?

Generally, contributions paid by an employer for a general employee should be relevant for the position held within the company and broadly comparable with a similar role within the workplace. Typically this will take into consideration the whole remuneration package including bonus, salary and benefits including pension contributions (excluding dividends). HMRC will use the 'wholly and exclusively' rules laid out in the Business Income Manual (BIM) which can be found on and specifically the rules laid out from section BIM46030 onwards. An example would be that it is unlikely that a pension contribution of £20,000 would be accepted under these rules for an employee earning £10,000 in a minor role for the company.

It can be more difficult for a controlling director to have the test above applied to them as in many circumstances they will take reduced salaries for the benefit of the company or take dividend payments. As a general rule of thumb it has been said that a director may take a remuneration package (including salary, bonus, benefits, pension contributions etc) which is justifiable based on the position held within the company and would be comparable to an arms length package paid to another individual holding a similar position, this should be acceptable as an allowable business expense. Again, further details are laid out in the BIM.

Please note that these are only broad descriptions and each case will be looked at on an individual basis by the Inspector of Taxes in line with their interpretation of the regulations.

What tax relief is available on employer contributions?

Where the employer is a limited company they can normally treat any pension contribution as a business expense and offset it against corporation tax due, as long as the ‘wholly and exclusively’ rules are met in relation to the UK trade being carried out. Where the employer is a sole trader or partnership the contributions will be set against the income tax liability of the sole trader or partners within a partnership.

It should be noted that in both of these cases, if the employer contribution is not allowed to be offset as a business expense, it cannot be refunded. Although this may be refused as a business expense it is still an allowable pension contribution and as such there is no facility to refund such a contribution.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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