This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
Employer contributions to any type of pension arrangement in a registered pension scheme are always paid gross. Corporation tax relief for employer contributions is not automatic. Instead, it is given at the discretion of the local Inspector of Taxes (that is, the employer’s local tax office). Tax relief is given by deducting the gross amount of the contributions from an employer’s taxable profits before corporation tax is calculated.
For a trade or profession, employer contributions are deductible if they are incurred wholly and exclusively for the purposes of the trade or profession. For an investment company, employer contributions are deductible if they are classed as an expense of management.
In general, the HMRC guidance suggests that checking whether a contribution meets the wholly and exclusively test or expenses of management test should only be necessary in limited circumstances. HMRC emphasise that as part of the cost of employing staff, pension contributions will be allowable. They also state that it will be relatively rare to have to consider whether there is a non-trade or non-business purpose for the employer's decision to make a pension contribution and confirm that it will always be a question of fact as to whether that is the case or not.
In other words, a pension contribution by an employer to a registered pension scheme in respect of any director or employee will receive corporation tax relief unless there is a non-trade or non-business purpose for the payment.
A practical way of determining whether there is a non-trade or non-business purpose or not is to look at levels of remuneration. If an employee’s remuneration package (including salary, benefits and pension contributions) is not excessive in relation to their job, then an employer contribution should be eligible for corporation tax relief.
Employer pension contributions don’t attract National Insurance contributions, unlike other elements of remuneration, such as salary, bonuses, commission and taxable benefits in kind. This makes employer pension contributions a particularly tax efficient component of an employee’s overall remuneration package.
It is important to note that when referring to contributions made by an ‘employer’ this can include contributions made by a former as well as a current employer. It can also include contributions made by an employer in its capacity as a ‘sponsoring employer’ of a multi-employer scheme.
If an individual isn’t an employee, or former employee, an employer contribution can’t be paid on their behalf (a non-employee shareholder could fall into this category). A company could make a ‘third-party’ contribution in respect of a non-employee but this would be treated for tax purposes as having been made by the individual. Consequently, the employer would not receive corporation tax relief on such a contribution.
If a controlling director is the driving force behind a company and is instrumental in generating its income, then the level of the remuneration package, including employer contributions, is a commercial decision and it is unlikely that there will be a non-business purpose for the level of package.
For a controlling director of an investment company the situation is slightly different. An investment company is a company that mainly obtains their income from investments (e.g. from property). An investment company can make employer contributions to a controlling director’s pension arrangement, but they would need to qualify as an expense of management to be able to be deducted from the taxable profits before corporation tax is calculated.
If an employee or director is a connected person, their remuneration package should be compared to unconnected employees performing a similar job. If comparable, any employer contribution should be accepted for corporation tax relief. If there are no comparable employees, the remuneration package should be commercial and in line with the job undertaken. HMRC explain what a connected person is here.
An increased employer contribution from a salary or bonus sacrifice arrangement will normally be treated as being wholly and exclusively for the purposes of trade and allowable as a deduction when calculating an employer’s taxable profits.
Employer pension contributions don’t attract National Insurance contributions (NIC), so exchanging salary for an employer pension contribution results in employer NIC savings.
A local Inspector of Taxes can consider previous levels of employer contributions and employee remuneration for comparison against the current remuneration and proposed contribution. They can also make allowances where:
- large employer contributions are being made by an employer in an underfunding situation.
- an employer is required to make a payment to a scheme following a contribution notice issued by the Pensions Regulator.
- increased contributions are being made on leaving or retirement.
- contributions are being made as part of the sale or purchase of a business.
- advantage is being taken of the annual allowance and carry forward rules.
- an employer contribution is made to the Pensions Protection Fund.
In general, if salaries are less than a commercial rate and pension contributions appear to be inflated, then local Inspectors can try to find out why this has occurred. If tax or national insurance planning (other than for salary or bonus sacrifice) was one of the purposes for the contribution then it is possible that the full contribution will not be allowable as a business expense.
It may be necessary to spread tax relief on employer contributions over several years. This applies when there’s a large increase in the level of employer contributions from one chargeable period to the next. If there are no employer contributions in the previous chargeable period, tax relief on contributions in the current chargeable period will not be spread.
There is a four-step process that should be followed to establish whether tax relief needs to be spread. Full details can be found in HMRC’s Pensions Tax Manual.
If there is any doubt about whether a proposed employer contribution will get corporation tax relief, the employer could seek confirmation from their local Inspector that the contribution will be relievable. However, in practice, a local Inspector may not be willing to provide such confirmation particularly at busy times such as around the end of a tax year.
An employer must keep records relating to the payment of contributions to their pension scheme. This helps ensure that the correct contributions are paid and provides evidence that the payment has been made should a dispute arise. An employer should keep this information for six years. The records should include:
- the gross earnings of their employees, and
- the contributions due to be paid by the employer and employees and, if different, the amounts actually paid to the scheme.
This ‘payment information’ on earnings, contributions and memberships should be kept up to date and the scheme provider or trustee should be informed of any changes. The trustees or pension provider need this information to meet their duties, such as their duty to monitor contributions and report material payment failures to the regulator. If they request additional payment information from the employer in order to monitor contributions, the employer must provide this information to the scheme within a ‘reasonable period’ of seven working days. If the employer doesn’t provide this they could be subject to a fine.
Employers also have specific record-keeping duties as part of automatic enrolment.
The Pensions Regulator (TPR) reports that incorrect or out-of-date information is the main cause of payment failure and disputes between an employer and their scheme provider or trustees.
Employers need to pay contributions to their pension scheme on time, including calculating and deducting contributions from their employees’ salaries. They should agree the due dates for paying contributions to the scheme with their trustees or pension provider. The law requires that when pension contributions are deducted from an employee’s pay, these need to be paid to the staff pension scheme no later than the 22nd day (19th if they pay by cheque) of the next month (there are special rules for the first deduction of contributions on automatic enrolment). An employer may agree an earlier date to pay their employer contributions with the trustees or administrators – however, it’s easier if they pay employer contributions on the same day as their staff contributions.
If an employer doesn’t pay contributions on time, it risks being fined by The Pensions Regulator (TPR).
Breaches of the law which affect occupational and personal pension schemes (including stakeholder schemes) should be considered for reporting to the Pensions Regulator. The requirement to report applies to:
- trustees and their advisers and service providers (including those carrying out tasks such as administration or fund management);
- managers of schemes not set up under trust; and
- employers sponsoring or participating in work-based pension schemes.
TPR states that all reporters should have effective arrangements in place to meet their duty to report breaches of the law, and breaches should be reported as soon as ‘reasonably practicable’. Failure to report when required to do so is a civil offence.
If an employer doesn’t pay pension contributions on time, TPR could fine it a fixed penalty of £400. If the employer still doesn’t pay the contributions, TPR can apply an escalating penalty which accrues daily.
HMRC’s Pensions Tax Manual:
HMRC’s Business Income Manual where the employer carries on a trade or profession:
HMRC’s Corporation Tax Manual where the employer is a company with investment business:
TPR information on employer contributions and funding:
TPR employer duties on record keeping:
TPR guide to paying contributions:
HMRC’s guidance in the Pensions Tax Manual, the Business Income Manual and the Corporation Tax Manual provides some certainty over the issue of corporation tax relief for employers who want to legitimately use pension contributions as part of the reward package for their employees. In particular, the guidance relating to controlling directors and connected employees confirms the information employers should consider when assessing whether a proposed contribution will qualify for corporation tax relief. Using the guidance along with assistance from the local Inspector of Taxes should ensure that any potential issues are resolved before an employer contribution is made.
An employer must keep records relating to the payment of contributions to their pension scheme and can be fined by TPR if they don't pay their pension contributions on time.