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Pension Contributions are Tax Efficient for Employee and Employer

Pension Contributions are Tax Efficient for Employee and Employer
21 Jun 2021
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Pension Contributions are Tax Efficient for Employee and Employer

Pension contributions to approved pension funds on behalf of employees and directors continue to be a tax-free benefit provided the annual input limit is not breached. The contributions are also deductible for the employer provided incurred wholly and exclusively for the purposes of the trade and paid before the end of the accounting period of the business.

For most taxpayers, the annual input limit is £40,000 and this limit includes contributions by the employee and contributions made by the employer on their behalf. It is also possible to take advantage of unused relief from the previous three fiscal years.

Payments into the pension by the employing business will be deductible against business profits. Currently this will only save 19% Corporation Tax, but from 1 April 2023 will save 25% where profits exceed £250,000 and 26.5% where profits are between £50,000 and £250,000. Note that these limits are divided by the number of associated companies, i.e. under common control.

There are provisions for exceptionally large contributions where the deduction is spread over 2, 3 or 4 years.

Although the contribution on behalf of the employee or director may be tax free, they are generally not able to access the fund until age 55.

There have been several “schemes” devised over the years to exploit the pension rules.

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