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July 23rd 2021

The tax benefits of pension contributions

The UK tax system continues to incentivise pension saving with generous tax breaks on offer, as this article explains.

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 overall limit applies to contributions by the employee plus contributions made by the employer on the employee’s behalf. It is also possible to take advantage of unused relief from the previous three fiscal years.

Payments into the pension fund 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.)

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 a number of “schemes” devised over the years to exploit the pension rules.

HMRC warning about unfunded pension arrangements

HMRC is currently attacking a marketed tax avoidance scheme using unfunded pension arrangements to avoid Corporation Tax, Income Tax and National Insurance contributions.

HMRC strongly believes these arrangements do not work and will seek to challenge anyone promoting or using these arrangements and make sure the correct tax is paid.

Users of these arrangements may pay considerable fees to use them yet may still have to repay the tax claimed to be avoided, as well as interest and a penalty.

Contact us for help optimising the tax breaks arising from your personal and business pension contributions.

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