Tax relief on employer contributions

In respect of employer contributions, these are paid gross to the pension scheme. Tax relief is given by allowing the contributions to be deducted as an expense when computing the profits of a trade, profession, or investment business. This reduces the amount of an employer’s taxable profit.

For employers, the contribution will need to meet the ‘wholly and exclusively’ rules if tax relief is to be given. Detailed guidance on this can be found in the Business Income Manual at BIM46000.

Employer contributions are not treated as a ‘benefit in kind’ on the employee. However, if funding employer contributions through salary sacrifice, the amount exempt from National Insurance contributions (NICs) will be capped at £2,000 a year from April 2029.

Tax relief on member contributions

Contributions made by anyone other than an employer will be treated as member contributions - even if made by a third party, rather than the member themself.

To receive tax relief on member contributions, the member must:

• | be an active member of a registered pension scheme, and
• | be a relevant UK individual aged under 75, and
• | total contributions must not exceed the greater of:
• • the ‘basic amount’ - currently £3,600, and
  • the amount of the individual’s relevant UK earnings chargeable to income tax.

Net pay and relief at source

If made under a ‘net pay’ arrangement, the employer will pay the contributions to the pension scheme from wages on the member’s behalf. The contribution will be deducted before the calculation of income tax, thereby granting the tax relief due. However, national insurance is still charged on the full gross pay figure before deduction of the pension contribution.

If paid to a ‘relief at source’ scheme, the member pays the contribution from their earnings after tax. The net contribution received by the scheme will receive tax relief at the ‘relevant rate’, which the scheme administrator will claim from HMRC.

The ‘relevant rate’ is either the Scottish basic rate, Welsh basic rate, or basic rate for the rest of the UK, depending on where the taxpayer resides. As all three rates are currently 20%, the tax relief that is reclaimed is always the same, although this could change in future if the Scottish or Welsh Governments differ their basic rate of tax from the rest of the UK.

Any taxpayers who contribute to a relief at source scheme, but pay income tax at a rate above 20%, will need to claim the balance of tax relief due. For example, a higher rate (40%) taxpayer making a gross contribution of £100 is due £40 in tax relief. They would therefore contribute £80 to the pension scheme, who would claim £20 (20% of £100) in tax relief via relief at source. The member will then need to claim the further £20 (20%) directly from HMRC.

Higher rate tax relief is claimed by completing the relevant section of the self-assessment tax return and sending it to their tax office. A claim can also be made by telephone or by letter.

Lower earners

Where someone is a nil-rate taxpayer or pays tax at the Scottish starter rate (19%), the relief at source scheme claims tax relief at the relevant rate of 20%. As HMRC does not recover the difference between the tax relief granted and actual tax paid, contributions via a relief at source scheme can provide a strong tax advantage over net pay for non-taxpayers (known as the ‘net pay anomaly’).

To fix this, for the 2024/25 tax year onwards, HMRC will identify non-taxpayers who made pension contributions via net pay arrangements and will offer them a top-up payment. This top-up payment will be equal to the tax relief they would have otherwise received.

Delays mean HMRC won’t now contact anyone about the 2024/25 tax year until Summer 2026 at the earliest. However, approximately one million people are expected to be offered a top-up payment of around £70 per year.

The annual allowance

Where an individual has sufficient earnings (or a generous enough employer), there is theoretically no limit on the amount of tax relievable contributions that can be made.

To stop high earners receiving excessive tax savings, the ‘annual allowance’ limits the amount of pension contributions that can be made each year with the benefit of tax relief – the annual allowance does not restrict the amount of tax relief given. Instead, it creates a further tax charge when the annual allowance is exceeded.

This tax charge is equivalent to the income tax due if the contribution was added to the member’s taxable income for the year – typically the same as the tax relief the member receives (or would have received if they and not their employer had paid it).

For most people, the annual allowance is currently £60,000 each tax year. If a member of a registered pension scheme in previous tax years, unused allowance from the last three years can be ‘carried forward’ to the current tax year.

Very high earners (those earning above £260,000 a year) may find their annual allowance is reduced by the tapered annual allowance (to a minimum of £10,000 a year).

Those who flexibly access a money purchase pension arrangement will trigger the ‘money purchase annual allowance’, reducing it to £10,000 a year.

Technical commentary

It’s important to understand the difference between a contribution that attracts tax relief and a contribution that’s within the annual allowance. These are separate tests.

If a member contribution exceeds relevant UK earnings and doesn’t attract tax relief, it can be refunded as a ‘refund of excess contributions lump sum’.

Important information

Please note this is for general information only and is based on LV's understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.