Chapter 2

Contributions to a registered pension scheme may be paid by an

• individual

• individual’s employer

• third party on behalf of the individual

An individual is able to contribute

an unlimited amount to any number of registered pension schemes (limit on tax relief eligibility)

Relevant UK earnings include

• employment income (salary, wages, bonus, overtime or commission)

• income derived from carrying on or the exercise of a trade, profession or vocation (whether as a sole trader or as a partner);

• income arising from patent rights and treated as earned income; and

• general earnings from an overseas Crown employment, which are subject to UK tax.

A relevant UK individual is

under 75 and either…

• has relevant UK earnings

• is resident in UK for some time during that year

• was resident at some time during the five tax years immediately before contribution (relief capped at £3,600 per tax year) and when they became member of pension scheme

• they or spouse has relevant earnings from overseas Crown employment subject to UK tax

If not relevant UK individual, can

make contributions but not eligible for tax relief

Max earnings for tax relief are

greater of £3,600 or 100% relevant UK earnings

Eligibility to recieve tax relief and relevant UK earnings is based on

the member of the scheme not the person contributing

Two methods of tax relief are

• net pay method (taken from employees gross pay before income tax deducted)

• relief at source method (contributions paid net of basic rate tax)

Relief at source works by

adding the basic tax relief into the pension and then if they are higher or additional they claim back on self-assessment

Adjusted net income is

total income from all sources (i.e. salary, interest, dividends etc.) less certain deductions

An individual’s adjusted net income is calculated to determine

how much of the personal allowance they have available or the level of High Income Child Benefit charge they may have to pay

Self-assessment tax is paid

• payment on account 31st January 2027 during current tax year (2026/27) - 50% previous years tax

• second payment on account 31st July 2027 following end of tax year (2026/27) - also 50%

• a balancing payment on 31st January 2028 following the end of the tax year (2026/27) - difference between tax liability and payments on account and any pension tax relief for CURRENT tax year received

Taking small salary and large dividend payment can

restrict amount of tax relief, so should either increase salary for the year or make an employer contribution for a large contribution

For salary sacrifice arrangement to be effective, there must be

• written agreement in place between employer/employee to reduce employee salary

• must be in place before salary reduced

• cannot take employees salary below NMW

Salary sacrifice is irrevocable in most circumstances but if not/can be changed

tax/NIC advantage lost

It may be possible to change terms if theres a lifestyle change like

marriage, divorce, or employee’s spouse/partner is redundant or pregnant

salary sacrifice pension contribution is done to enable

higher pension contribution to be made, but take home pay is unchanged

Advantages of salary sacrifice are

• if already paying a contribution take-home pay is usually same or even higher

• if its a new pension, reduction in take-home pay will be less than gross pension contribution

• NI savings may be paid in to increase contribution at no additional cost

• as salary reduced WTC may increase

• higher earnings - may use it to get back some personal allowance

• earning more than £60k - use sacrifice to reduce earnings so no tax charge for child benefits

Disadvantages of salary sacrifice are

• salary reduced so may decrease death in service benefits (notional salary can avoid this)

• may reduce borrowing capabilities with mortgage/loans - but only little as they go on affordability now not multiple of salary

• can lose security benefits like maternity benefits

HMRC view PCLS as unauthorised payment if

• the PCLS when added to any taken in last 12m exceeds £7,500

• the PCLS means pension contribution paid is significantly greater than otherwise be (contribution more than 30% higher and cumulative sum of extra exceeds 30% of PCLS)

• additional contributions are made by individual or someone else

• recycling was pre planned

Regardless of amount of contribution, the employer will be

eligible for tax relief in full

The employer’s contribution is paid

gross and is allowable as a business expense (tax relief against corporation tax or income tax if sole trader) - must meet wholly and exclusively test

Circumstances where assessment of whether contribution allowable under the wholly and exclusively rules may be necessary include

where the contribution is for a controlling director, or close friend or relative of a controlling director - usually fine if remuneration package is comparable with someone unconnected doing similar duties

In terms of the remuneration package, it does not take into account

dividends

Tax relief on an employer’s contribution is usually given

in the accounting period in which the contribution is paid unless loss is created which can be carried back/large contribution subject to spreading

An employer’s contribution will be spread over a period of years for tax relief purposes if

• it exceeds 210% of the contribution paid in the previous chargeable period

• the amount of the excess (defined as the amount paid over and above 110% of the contribution paid in the previous chargeable period) is £500,000 or more.

An employer contribution does not have to be spread if the increased contribution is attributable to the funding of

• cost of living rises for pensioner members; or

• future service liability for new scheme entrants.

Spreading table for tax relief

• £500,000 - £999,999 = 2 accounting periods

• £1,000,000 - £1,999,999 = 3 accounting periods

• £2,000,000 or more = 4 accounting periods

MPAA is designed to work with the annual allowance rules to ensure that

individuals cannot abuse the pension flexibilities

MPAA for this tax year is

£10,000 per annum

For defined contribution schemes, total pension input includes

• relievable pension contribution paid by member or someone else - includes any basic rate tax relief (so gross amount) and any that doesn’t get tax relief

• any contribution paid by the employer

Elements not included in the pension input amount are

• contributions paid by the individual, or someone other than the individual’s employer, after the individual has reached the age of 75

• investment income or returns

For active members of defined benefit (and cash balance) schemes, the total pension input is defined as

the increase in the capital value of the individual’s rights over the PIP

A deferred member of a defined benefit scheme is usually treated as having

no pension input for a tax year

For DB schemes two other exclusions from total pension input are

• contributions and defined benefit accrual in the tax year in which the member dies

• contributions and defined benefit accrual in the tax year in which benefits are taken due to the member’s severe ill-health (where expectation of life is less than twelve months).