Pension contributions is tax efficient for both 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 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, i.e. under common control.
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.
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