Pension Contributions for Company Employees

Allowable Deduction

For a company expense to be deductible for tax purposes then is must be wholly and exclusively incurred for the purposes of the trade in line with CTA 2009 s54. This is always subjective and HMRC would consider each case based on the reason for the contribution.

Normally, the contributions to employees pension schemes are an allowable deduction as they are made by the employer as part of the employees whole remuneration package. However HMRC may consider large contributions to be for a non trade purpose. This would occur when the remuneration package is excessive for the value of the employees work undertaken. If this is the case they could argue that only the proportion of the contribution which relates to the trade would be allowable. If a company had attained larger profits due to the work generated by the directors and employees, there could be an argument that the employees did deserve the higher remuneration package. Full guidance on what would be considered a non-trade purpose can be found at BIM46035.

Timing of Deduction

Pension contributions are usually deductible for tax purposes in the period in which they are paid not when they are accrued (FA 2004 s196).

Tax relief for employer contributions will be spread over several accounting periods if certain conditions are met when contributions are paid over two successive periods (FA 2004 s197):

1. Employer contributions made in the current period exceed 210% of the contributions made in the preceding period.
2. The excess of the current period contributions above 110% of the preceding periods contributions exceeds £500,000.

If both conditions are met, the excess of current period contributions over 110% of the preceding periods contributions will be spread over the current and subsequent accounting periods.

Consequences for the Employees/Directors

The employer must be aware that if the total pension contributions of both the employer and employee exceed the £40,000 annual allowance then the director would become liable for the annual allowance charge. If the directors adjusted income in excess of £240,000 then the allowance is subject to tapering provisions. It can also increased by unused annual allowances from the previous three tax years providing the director was a member of a registered pension scheme in those tax years. (FA 2004 s228A)