Maximising Tax Relief on Employer Pension Contributions

As a UK business owner or employer, one of your key responsibilities is ensuring that your employees are provided with adequate retirement benefits. One of the most beneficial ways to do this is through employer pension contributions. Not only does this help to provide for your team’s future, but it also comes with attractive tax relief advantages.

In this post, we’ll break down how employer pension contributions work, the tax relief available, and important thresholds to keep in mind to ensure you’re getting the most out of these contributions.

What Are Employer Pension Contributions?

Employer pension contributions are payments made by a business into its employees’ pension schemes. These contributions can be made to defined contribution (DC) schemes, which are the most common, or to defined benefit (DB) schemes.

As a business owner, you are legally required to contribute to an employee’s pension if they meet certain criteria under auto-enrolment regulations. Even if you are not legally required to contribute to an employee’s pension, making voluntary contributions can have multiple advantages — for both you and your employees.

Tax Relief on Employer Pension Contributions

One of the most significant advantages of employer pension contributions is the tax relief. Employer pension contributions are tax-efficient, offering benefits for both businesses and employees.

1. Corporation Tax Relief

Employer contributions are treated as a business expense, which means they are deductible from the business’s profits when calculating Corporation Tax. This can reduce your company’s tax liability, improving your bottom line.

For example, if your company makes an annual pension contribution of £10,000 on behalf of employees, that £10,000 is deductible from your taxable profits, potentially lowering your Corporation Tax bill by 19-25%, depending upon the level of profit your company is making. 

2. National Insurance (NI) Savings

Employer pension contributions are also exempt from National Insurance contributions. This means that, in addition to saving on Corporation Tax, businesses can also avoid the Employers National Insurance charge on these contributions (13.8%, and 15% from April 2025). This can be a significant saving, particularly for larger businesses.

3. Employee Benefits

Employees also benefit from pension contributions made by their employers. Employer contributions are not counted as taxable income for employees, meaning they aren’t subject to Income Tax or National Insurance. This tax advantage helps employees maximise their retirement savings without reducing their take-home pay.

Key Thresholds to Consider

Understanding the various thresholds that apply to pension contributions is essential for ensuring compliance with tax rules and making the most of your contributions. Here are some important figures to keep in mind:

1. Annual Allowance

The Annual Allowance is the limit on how much you and your employees can contribute to pension schemes each year while still receiving tax relief. For most people, the Annual Allowance is £60,000 for the 2024/25 tax year. This includes both employee and employer contributions.

If contributions exceed this limit, the excess will be subject to tax. For example, if you or your business makes contributions that push the total pension contributions over the £60,000 threshold, the excess will be taxed at the individual’s marginal tax rate. However, unused Annual Allowance can be carried forward for up to three years, subject to conditions, allowing more flexibility for larger contributions in some cases.

2. Tapered Annual Allowance

For high earners, the Annual Allowance may be reduced. This is known as the “tapered Annual Allowance.” If an employee’s adjusted net income exceeds £260,000, their Annual Allowance may be reduced.

To avoid penalties, it’s essential to monitor employees’ total income and pension contributions if they are in the high-earning category.

3. Lifetime Allowance (LTA)

The Lifetime Allowance refers to the maximum value of all pension savings an individual can accumulate over their lifetime without facing additional tax charges. As of the 2024/25 tax year, the Lifetime Allowance was abolished, meaning individuals are no longer subject to tax charges when they exceed a certain pension pot value during retirement.

This change offers more flexibility to contribute to pensions without worrying about breaching the LTA threshold.

Maximising the Benefits of Employer Pension Contributions

To ensure that your business and employees are maximising the tax relief available through pension contributions, here are a few best practices:

1. Contribute Early and Regularly – Setting up regular contributions can help spread the costs throughout the year, making it easier to manage your business’s cash flow while taking full advantage of tax relief.
2. Review Employee Salaries – By ensuring contributions are structured based on salary levels and considering salary sacrifice arrangements, you can optimise both your business’s and your employees’ tax positions.
3. Monitor Annual Allowance – Keep an eye on both your business’s and your employees’ contributions to avoid exceeding the Annual Allowance. Regularly reviewing pension contributions ensures you can act promptly if any employee is approaching the limit.
4. Consult with a Pension Specialist or Accountant – Tax relief rules can be complex, particularly when dealing with high earners or large contributions. A professional advisor can help guide your business through the regulations and ensure that you’re making the most of all available tax-saving opportunities.

Conclusion

Employer pension contributions offer numerous advantages for UK businesses, from tax relief to National Insurance savings. By understanding the key thresholds and rules surrounding these contributions, you can help secure your employees’ financial futures while simultaneously benefiting your business’s bottom line.

At Munro Bowman, we specialise in helping businesses navigate the complexities of pension contributions and tax relief. If you have any questions about how pension contributions can work for your business or need advice on managing your tax affairs, don’t hesitate to contact us.

We also have Financial Advisor contacts which we can share with you to assist with the set up of your Employer Pension Scheme.