Tax relief on pension contributions

Reasonable allowances and those on behalf of a controlling director

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Like any business expense, to be an allowable deduction against profits, pension contributions have to be made wholly and exclusively for the purposes of the business. Basically, this means that the contribution should be at a reasonable level for the individual concerned.

Provided that the contribution to a registered pension scheme meets the test of ‘wholly and exclusively for the purposes of the trade’ it will be an allowable deduction for corporation tax purposes (s54 Corporation Tax Act 2009).


The deduction for the employers’ contributions to registered pension schemes is for the period of account in which it is paid by the employer, and for no other period. In practice, as the accounting treatment is not followed for tax purposes, this means that an employer’s tax computation is adjusted to:

  • add back the deduction for the pension scheme contributions shown in the profit & loss account
  • give a deduction for contributions to registered pension schemes on a ‘paid’ basis.

There are two instances when the contribution is not accounted on the ‘paid’ basis: this is when ‘spreading relief for substantial pension contributions’ will apply or where the employer has ceased trading.

  • Spreading is where the relief due to an employer on the making of a contribution to a registered pension scheme is not given entirely in the chargeable period in which the payment is made. Instead, part of the relief due is spread forward into future periods. Spreading of deductions will be required where there is an increase over 210% in the level of employer contributions paid from one period to the next, unless the increase is below £500,000. The legislation is written so that where no contribution was paid in the previous chargeable period, for example if an employer has only just set up a pension scheme, tax relief on contributions in the current chargeable period will not be spread.

    Only tax relief on an ‘excess’ contribution of £500,000 or more will be spread. The length of time the tax relief will be spread over depends on the size of the excess. Read the further guidance.

  • Where an employer who has ceased trading has to make a payment into a registered pension scheme to satisfy a liability crystallising under s75 of the Pension Act 1995, the payment is treated as being made on the last day of trading and is deductible in arriving at the profits for the final period of trading.

Pension contribution made on behalf of a controlling director

Employer’s contribution made in respect of a controlling director-shareholder or a member of their family may not be deductible if it is viewed as being made for a non-trade purpose.

One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. Consideration should be given to the amount of the overall remuneration package, not simply the amount of the pension contribution.

HMRC has stated that the contributions are paid wholly and exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director, is comparable with that paid to unconnected employees performing duties of similar value.

Pension contribution and cessation

Contributions made as part of the arrangements for going out of business, in particular where there is no pre-existing contractual obligation to make such a contribution, are not considered as meeting the ‘wholly and exclusively for the purpose of the trade’ test.

In the case of CIR v Anglo Brewing Co Ltd [1925] 12 TC 803, the company decided to close down its business. In the past, the company had granted pensions to employees on their retirement. The company promised to treat its present employees with equal generosity. The company therefore agreed pension amounts (which were later commuted for lump sums) and compensation payments. The company claimed the costs as a deduction in computing its profits.

The High Court took the view that the payments were made for the purpose of winding up the company and that no deduction was due for the pensions or the compensation. There is now a statutory relief for redundancy payments but the principle of the decision, that payments to go out of business are not allowed, remains valid.

Payments made to satisfy a liability under s75 of the Pension Act 1995, although often triggered by a cessation, are distinct from payments made for the purpose of going out of business; such payment is allowed and is treated as being made on the last day of trading.

Pension contribution and The Pensions Regulator contribution notice

If The Pensions Regulator issues a contribution notice requiring an employer, or a person connected with the employer, to pay an amount into a scheme or to the Pension Protection Fund to make good under-funding, that amount is an allowable cost, in the period of payment. If the contribution notice issued by the Pensions Regulator results in the employer making a payment after the trade has ceased, the payment is treated as being made on the last day of trading.

Annual allowance charge

The annual allowance is the most a person can pay in their pension pots in a tax year (6 April to 5 April) before a tax charge will arise. The maximum permitted contribution is currently £60,000, increased with effect from 6 April 2023 from the previous maximum of £40,000. The annual allowance limits the total input into a pension scheme and includes both employee and (employer) company contributions. You can refer to previous AA limits.

While income and corporate tax deductions are initially given in the normal way, each pension fund member’s total input into their fund is then tested separately to determine whether they are liable to an AA income tax charge. The £60,000 AA limit is based on the total pension contributions paid in the relevant pension input period (PIP), which is aligned with the tax year.

In computing the AA charge, members are able to bring forward any unused relief for the three previous years (provided they were a member of a pension scheme in those years).

Companies that are planning to make substantial contributions will therefore need to consider the potential annual allowance income tax charge that may arise in the member’s hands.

HMRC does not tax anyone for going over their annual allowance in a tax year if they:

  • retired and took all their pension pots because of serious ill health
  • died.

HMRC's Business Income Manual provides further guidance on what matters should be considered when deciding whether to allow pension contributions as a deductible business expense.