Employer contributions explained

Employer pension contributions are a very tax-efficient way of remunerating employees. As part of our Bitesize Technical series, Senior Technical Consultant Lisa Webster explains the rules around employer contributions, including:

• how tax relief is given to employers;
• the ‘wholly and exclusively’ rule;
• salary sacrifice; and
• the annual allowance and employer contributions.

Watch the bitesize video now, or scroll down to read through the key talking points.

Key insights on employer contributions

Where can employer contributions be paid?

An employer can make contributions for its employees to any UK-registered pension scheme. This can be an occupational scheme set up by the company, or a personal pension held by the employee.

How does the employer receive tax relief?

The pension contribution is a tax-deductible business expense for the employer (like salary), so contributions reduce the employer’s taxable profit. This means less corporation tax falls due.

Is there a limit on employer contributions?

There is no fixed limit on employer contributions, and the level of contribution that can attract tax relief is not linked to the employee’s earnings. However, the ‘wholly and exclusively’ rule should be met and the contribution will count towards the employee’s annual allowance.

What is the ‘wholly and exclusively’ rule?

To be tax deductible, the contribution must be wholly and exclusively for the purposes of the trade of the business. Broadly speaking, this means the contribution will be allowable where it is part of a remuneration package that is in line with the value of the work that individual does for the employer. In the case of directors and family members, this may be examined more closely, but the same principle applies.

Put simply – does the individual add that value to the business? If the answer is yes, then there is no issue with a pension contribution being in excess of the amount of salary the employee is paid. When deciding if the contribution meets the rules, it is the whole remuneration package that is considered.

What is salary sacrifice?

Some employees choose to give up some of their salary in lieu of a larger pension contribution from their employer – this is commonly known as ‘salary sacrifice’. Contributions under salary sacrifice are therefore employer contributions.

Annual allowance and employer contributions

Although there is no limit on tax relief for employer contributions provided the wholly and exclusively rule is met, the annual allowance still applies.

This means that if a large employer contribution was made which resulted in the employee exceeding their available annual allowance, it could result in a tax charge for the employee personally (even though the employer could still get full tax relief).

More Bitesize Technical

Third party contributions explained

Learn more about the rules around third- party contributions. Watch the video here.