Employer contributions explained

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 contribute to any UK-registered pension scheme for its employees. This could be:

• an occupational scheme set up by the company; or
• a personal pension held by the employee.

How does the employer receive tax relief?

Employer contributions are a deductible business expense. This reduces taxable profits and, in turn, lowers the corporation tax bill.

Is there a limit on employer contributions?

There’s no set cap on employer contributions, and the amount isn’t linked to the employee’s earnings.

However:

• the contribution must meet the ‘wholly and exclusively’ rule; and
• together with any personal pension contributions, it should not exceed the employee’s annual allowance.

What is the ‘wholly and exclusively’ rule?

To qualify for tax relief, the contribution must be wholly and exclusively for the purposes of the business. In practice, this means it should form part of a remuneration package that reflects the value of the individual’s work.

For directors and family members, HMRC may look more closely, but the principle is the same.

Does the individual add that value to the business?

If yes, there’s no issue with a pension contribution exceeding salary. HMRC considers the entire remuneration package, not just salary.

What is salary sacrifice?

Salary sacrifice is where an employee gives up part of their salary in exchange for a larger employer pension contribution. These contributions are treated as employer contributions for tax purposes. This has the advantage of saving both the employer and employee National Insurance Contributions (NIC) as NIC apply to salary but not employer contributions.

Annual allowance and employer contributions

Regardless of whether the employer contribution is fully deductible for tax purposes, the annual allowance still applies.

If a large employer contribution pushes the employee over their available allowance, they could face a personal tax charge – even though the employer benefits from tax relief.

More Bitesize Technical

Third party contributions explained

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