These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.Wed Sep 11 09:39:00 GST 2019 Back to results
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, of an employer (or associated employer) an employer contribution can’t be paid on their behalf (a non-employee shareholder could fall into this category). It might be possible for a third party contribution to be paid by the company, but this would be treated for tax purposes as though the member had made a personal contribution, meaning tax relief would be limited to the greater of £3,600 (gross) or 100% of the member’s relevant UK earnings.
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 (eg, from property). If a controlling director has no contract of employment and is not providing any additional services to the investment company, our understanding is that personal contributions would be limited to £3,600 gross pa on the assumption their investment income is not classed as relevant UK earnings. Conversely, if a controlling director does have a contract of employment and is providing additional services to the investment company, then the rate of remuneration specified in the contract for these services could be classed as relevant UK earnings. So, personal contributions could be based on the higher of 100% of relevant UK earnings or £3,600 gross pa.
The investment company can also make employer contributions but they would need to qualify as an expense of management to be able to be deducted from taxable profits before corporation tax is calculated.
If an employee or director is a connected person (i.e. a relative or close friend of a controlling director), 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.
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 take into account 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 a number of 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(Opens new window).
If there is any doubt about whether a proposed employer contribution will get corporation tax relief, the employer could approach their local Inspector for guidance prior to payment to ask for confirmation as to whether tax relief will be granted or not. This ‘form of clearance’ acts like a form of advance approval. However, in practice, a local Inspector may or may not be willing to provide such confirmation particularly at busy times such as around the end of a tax year.
Guidance on the issue of whether an employer contribution could be eligible for tax relief is contained in:
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:
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 to be taken into account when assessing whether a proposed contribution will qualify for corporation tax relief. Using the guidance along with possible help from the local Inspector should ensure that any possible issues are resolved before an employer contribution is made.
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