Can your business pay into your pension? Yes – but tax rules apply. Discover how employer contributions work, what’s deductible, and how to avoid HMRC scrutiny. Understand how to make pension payments tax-efficient for directors and employees.

A client recently asked whether they could pay pension contributions through their business. It’s a great question that many business owners and directors may not have considered fully. The short answer? Yes, a business can make pension contributions – but there are rules around tax relief that you should be aware of.

How Does It Work?

There’s no fixed limit on how much a company can contribute to an employee’s pension. However, HMRC applies the ‘wholly and exclusively’ rule to get tax relief on those contributions. This means the pension payment must be made purely to run the business and not for personal reasons. If it meets that test, the contribution can be deducted as a business expense, reducing corporation tax.

That said, there are a few things to keep in mind:

• Employer pension contributions count towards the employee’s annual allowance, which affects how much tax-free pension savings they can build up in a year.
• If the contribution is unusually large, HMRC may investigate to ensure it’s justified as part of the employee’s overall pay package.
• The timing of the payment matters – pension contributions are only deductible in the financial year they are made.

What About Directors?

If you are a director of your own company, you have flexibility in how you take your income – salary, dividends, or pension contributions. So, would taking a large pension contribution instead of a salary create a tax issue?

Generally, no. As long as the overall remuneration package (salary, bonuses, benefits, and pension contributions) is commercially reasonable, it should qualify for tax relief. HMRC usually accepts that a pension contribution for a director is a legitimate business expense, particularly if they are the driving force behind the company’s success.

However, if a pension contribution is significantly higher than a director’s salary, it could raise questions. The key is to ensure it makes sense in the context of the company’s financials and the director’s role.

What About Employees?

Employer pension contributions are usually straightforward, if the overall salary and benefits package is in line with market rates, the pension contribution is a legitimate expense.

HMRC may take a closer look at your pension contributions if your employees are either spouses, family members, or close associates of the business owner. This is to ensure the contributions align with the work the employee is doing and are not part of the business owner’s own remuneration package, leading to tax complications.

What About Ex-Employees?

A company can still make pension contributions for former employees, such as retirees, and in some cases, even after the business has been sold or closed. The key is whether there was a prior commitment to those contributions. If so, they are generally considered a legitimate business expense.

What If the Pension Is for Someone Who Doesn’t Work for the Company?

This is where things change. A company can make a pension contribution for someone who isn’t an employee – such as a director’s spouse or child – but in this case, it would be classed as a third-party contribution. This means the business wouldn’t get tax relief on it, and the contribution would instead be treated as if the individual made it.

Pension contributions can be a great way for business owners to plan while reducing their corporation tax bill. However, to stay on the right side of HMRC, it’s important to ensure contributions are made for genuine business reasons and align with the overall pay structure.

If you are considering making pension contributions through your business, we recommend speaking to an accountant to ensure you get the best tax advantages and stay compliant. Get in touch with Whittaker & Co – we’re here to help.

PTM043100 – Contributions: tax relief for employers: introduction – HMRC internal manual – GOV.UK

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