Pension contributions: Q&A
Questions and answers on tax relief and annual allowance (including carry forward) considerations when contributing to pensions.
Individual contributions: relevant earnings
Q: What are considered relevant earnings for a self-employed person? Is it total profit, or profit less costs and expenses?
A: It’s the amount of self-employed income liable to taxation, i.e. profit less costs and expenses. Profits are calculated over the chosen period of account (which is unlikely to align with the standard tax year) and are assessed for income tax in the tax year the accounting period ends.
Q: Can an individual actually make a personal pension contribution in excess of their relevant earnings, knowing that it will not receive tax relief?
A: This will depend if the scheme they want to contribute to can accept contributions which are not eligible for tax relief. Many providers cannot accept personal contributions which are not eligible for tax relief. However, clients who hold existing Retirement Annuity Contracts (RAC) may still pay contributions gross, as they claim tax relief for this style of contract through the self-assessment process (by deducting the gross contribution from their taxable earned income amount - the usual tax relief limits apply). Contributions to a RAC can exceed relevant earnings although the gross contribution amount uses annual allowance even when there is no tax relief due.
Q: Client is a higher rate tax payer but their income is only made up of dividends and bond gains. Can they pay a large pension contribution to reduce their tax bill?
A: Tax relief is limited to 100% of relevant earnings or £3,600, whichever is greater, in the tax year the contribution is paid. Neither dividends nor bond gains are relevant earnings so this client would only receive tax relief on a pension contribution of up to £3,600 gross. Although a large contribution would not be possible, making the £3,600 gross to a RAS scheme would expand the basic rate band by this amount, which may reduce the tax bill.
Q: Is foster care income regarded as relevant earnings for pension contributions?
A: You need to establish exactly how this is paid and taxed. The situation will depend on whether the client has elected to use the "profit method" or "simplified method" and these options are explained in the following links:
The following link is to a useful module, which provides guidance for foster carers and how they pay tax and NIC -
The following link explains that the reward element (or accepted profit) is regarded as self-employed earnings -
In summary, our understanding is that it will be the reward element (or accepted profit) that would be classed as relevant earnings for the purposes of pension contributions.
Q: Is Seafarer’s income regarded as relevant earnings for making a pension contribution?
A: Depending on the seafarer’s residency status, his earnings may be treated as UK net relevant earnings, however they are then allowed a "deduction" to claim back tax (see HMRC information on Seafarers Earnings Deduction: tax relief if you work on a ship
The Employment Income Manual suggests pension contributions are allowable but are taken into account prior to calculating the seafarer’s deduction.
The client’s accountant should be familiar with the self-assessment process required.
Employer contributions: corporation tax relief
Q: Can an investment only company pay employer pension contributions for their employees, and receive corporation tax relief?
A: This is covered in the Pensions Tax Manual.
Employers with investment business
Section 196(3) Finance Act 2004
Employer contributions to a registered pension scheme will be deductible as an expense of management of the employer’s investment business under Chapter 2 of Part 16 of the Corporation Tax Act 2009 (expenses of management: companies with investment business).
But the legislation is modified so that:
- relief will be available to an employer’s contribution where, ordinarily, it would not be allowed because the contribution represents an expense of a capital nature, and
- the contributions can only be referred to the accounting period in which they are paid.
Q: Can an employer pay pension contributions in excess of their gross trading profit for an accounting period, and if so, how do they then claim corporation tax relief?
A: The company accountant should be able to give guidance, however, broadly speaking;
The pension “cost” will be shown as a business expense (there are different ways of calculating cost as between DC and DB schemes).
The employer gets a tax deduction for the corporation tax accounting period in which the contribution is paid.
That deduction reduces taxable profits and could create (or even increase) a loss.
There are various ways in which tax relief can be obtained for that trading loss. The main ones are:
- Carry forward against profits of the same trade
- Carry back against profits of the previous 3 accounting periods*
- Set-off against other (i.e. non-trading) income or capital gains of the same accounting period
- Surrender to other companies in the same group (if the loss making company is part of the same group).
*Finance Bill 2021 will temporarily extend the period for which trading losses can be carried back against previous profits. This extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022.
Trade loss carry back will be extended from the current one year entitlement to a period of 3 years, with losses being carried back against later years first.
Q: A Charity wants to make a pension contribution for its employee. Can the Charity claim corporation tax relief on such a contribution?
A: A Charity does not pay Corporation Tax so there is no Corporation Tax Relief available.
Q: Can an employer receive tax relief on a pension contribution paid for an employee who has attained age 75?
A: The usual corporation tax relief rules apply. There is no age restriction for an employer pension contribution, which can be paid on behalf of an employee of any age. Providing the wholly & exclusively test is satisfied, then the employer will receive corporation tax relief in the usual manner.
NB there is no tax relief on personal contributions or third party contributions paid by or in respect of an individual who has reached age 75.
Q: My client is going to work abroad for their UK employer and will become a non-UK taxpayer. If the employer still wishes to make a pension contribution into the employees UK pension will the company get corporation tax relief and does this still count towards the client’s annual allowance.
A: The normal rules for employer contributions apply i.e. if the contributions are paid wholly and exclusively for the purpose of trade it will be an allowable deductible expense before arriving at the profit for the accounting period. The contribution is still a pension input amount for annual allowance purposes. As such the client needs to keep track of all pension input amounts as normal and available carry forward where eligible, if required. Submit a tax return if there is an annual allowance excess and pay any tax due to HMRC if payment of the tax charge is not met via Scheme Pays. It’s important to remember that even if the scheme pays an AA charge, this must be reported by the member completing a tax return.
Third party contributions
Q: An adviser has been ordered to pay compensation to a client in respect of mal-administration. Can this simply be added to the client's pension fund?
A: Any funds added to a pension plan (other than transfer of existing pension fund money) must be treated as a pension contribution and will be subject to the usual tax relief and annual allowance limits. Where an adviser pays compensation directly to a client's pension this will be regarded as a 3rd party payment and the client must have sufficient net relevant earnings to receive tax relief and sufficient available annual allowance, or else an AA excess tax charge would be due.
Tax relief and annual allowance
Q: When is an individual pension contribution eligible for tax relief?
A: The short answer is, in the tax year in which it is paid. But to be more specific, it is the “contract made date” that determines the tax year in which a single contribution or a first regular contribution is paid, and this is the later of;
- The date of signing of the fully completed application form,
- The date of commencement of the policy, and
- The date of receipt of the application form, payment method (i.e. cheque or direct debit instruction) AND full money laundering requirements. However, where the application form is incomplete, the “contract made date” will be the date of receipt of the last piece of information needed in order to process the application.
All of these dates must be 5th April or earlier AND for payments by cheque, the cheque must be presentable to and honoured by the bank, for the current tax year status to apply.
This information is based on the current rules as they stand at 6 April 2019. As we’ve seen in earlier years, where the Chancellor declares an impending change to tax relief rules, he may also immediately introduce anti-forestalling measures to prevent those who may otherwise take the opportunity to maximise their tax relief before the formal changes can be introduced.
Q: When is an employer pension contribution eligible for tax relief?
A: Tax relief on employer contributions works by deducting allowable contributions (eg those which satisfy the wholly & exclusively rule) as an expense/ expense of management when calculating the profits liable to corporation tax.
Deductions are only allowed in the chargeable period (i.e. the company’s financial year) in which the contributions are paid. For an employer pension contribution to be paid it must have actually been paid with the monies cleared; having an ‘accounting entry’ i.e. an accrued liability for the payment is not sufficient.
This differs from the rules applying to individual pension contributions which only require the payment method to be received by tax year end, rather than actual cleared funds.
Q: Is a client's Annual Allowance limited to their relevant earnings?
A: No. Relevant earnings are used to work out the maximum personal tax relief. The Annual Allowance rules are not related to, or restricted by, the relevant earnings figure.
Say a client earns £25,000 in this tax year. He still has the standard Annual Allowance of £40,000 (assuming neither Tapered Annual Allowance nor Money Purchase Annual Allowance apply).
He is unlikely to use all of his AA as he will only receive tax relief on a personal contribution up to £25,000 gross, which he pays. This is the first time he joins a registered pension scheme (RPS).
If in the following tax year he earns £55,000, he could pay a contribution of £55,000 gross and receive tax relief. For the AA test, he'd fully use that year's allowance of £40,000 and he can carry forward the unused AA of £15,000 from the previous year (NB no earlier carry forward as he was not a member of RPS before that) so there is no AA excess in this instance. The term ‘carry forward’ relates to unused annual allowance and is only required where total pension inputs in the tax year exceed the standard (or tapered) annual allowance.
Remember that any employer contributions also count towards an individual’s annual allowance limit. If there was also an employer contribution in this example, this would cause an AA excess for the member, and the member would need to report and pay the AA charge.
Q: My client takes a salary of £16,500 from the Ltd company he owns. Is he restricted to paying himself an employer pension contribution which does not exceed his relevant earnings i.e. £16,500?
A: There is no link between employer pension contribution amounts and an employee's relevant earnings. An employer can make a pension contribution of any amount. However, corporation tax relief will be subject to satisfying the wholly and exclusively rule and the full amount of the contribution will be tested against the member's available annual allowance. Where the member has insufficient Annual Allowance (including any carry forward), then an Annual Allowance excess exists and the corresponding tax charge must be reported by the employee through self-assessment.
The employee is responsible for paying any Annual Allowance excess tax charge. In certain circumstances they may be able to ask their pension scheme to pay the charge on their behalf (by reducing their pension benefits/ fund), however, they must still report this through self-assessment.
Q: My client is moving abroad and wants to continue paying personal pension contributions to her existing plan. What are the rules around this? Will she still receive tax relief?
A: Providing your client satisfies the definition of a relevant UK individual then she can continue pension contributions for up to 5 full tax years after the tax year she leaves the UK. The usual rules for tax relief, i.e. 100% of relevant earnings or £3,600 whichever is greater, also apply. So if your client will have no relevant UK earnings the maximum contribution for tax relief will be £3,600 gross/ £2,880 net - assuming paid to a scheme operating Relief At Source.
Q: My client did not complete a self-assessment tax return three years ago to claim higher rate tax relief on his pension contribution. What should he do?
A: You can claim a refund up to 4 years after the end of the tax year it relates to. Find out more on self assessment tax returns.
Q: Client is a member of a money purchase type employer pension scheme. Client has relevant earnings of £25,000. Employer pays a pension contribution on behalf of the individual of £1,250pa. Assuming neither the Money Purchase Annual Allowance nor a Tapered Annual Allowance apply, what is the maximum contribution the client can pay which will receive tax relief?
A: In this scenario, the maximum personal contribution is 100% of relevant earnings i.e. £25,000 gross. The employer contribution is ignored for personal tax relief. However, the total of the employer and employee contributions will be tested against the available annual allowance. £26,250 is within the AA of £40,000 so there is no AA excess in this instance.
Q: My client is an active member of his employer’s defined benefit pension scheme. He also wants to make a personal pension contribution. How do I calculate the maximum personal contribution allowed for tax relief? He has a pensionable salary of £37,500 and pays 3% employee contribution.
A: Calculation one – tax relief
The client already pays £1,125 to the DB scheme therefore, to be eligible for tax relief, he can only pay up to a maximum of (£37,500 - £1,125) £36,375 gross to a personal pension plan.
Calculation two – annual allowance
His DB pension input amount for the current pension input period is estimated at approximately £11,000. He has fully used his annual allowance for previous years so has no carry forward available.
Therefore, available annual allowance is £40,000 less the DB pension input amount for the current tax year of £11,000 leaving £29,000.
The remaining annual allowance is £29,000 ie less than £36,375. This means your client could pay up to £36,375 and receive tax relief on the whole amount. However, you know that his total pension savings would then exceed his available annual allowance (he has no carry forward) and he would have to report the excess of £7,375 (36,375 - 29,000) and declare the related tax charge. An AA excess/ charge reduces the tax efficiency of making this level of personal contribution.
In this scenario it may be more appropriate to limit the individual pension contribution to £29,000 gross as this will receive tax relief without causing any annual allowance excess.
As always, there will be exceptions to the rule. There may still be a net overall benefit for an individual to pay a personal contribution that actually causes them to have an annual allowance excess. This would be the case if the individual wanted to pay a larger pension contribution to get them out of the child benefit or personal allowance tax traps, or to reduce their threshold income to avoid a tapered annual allowance etc.
Q: My client, who lives in England, earns £5,000 above the higher rate threshold. She intends to make a personal contribution of £40,000 gross/ £32,000 net so she'll benefit from full higher rate tax relief i.e. she'll claim higher rate relief of £8,000 through self-assessment. Is this correct?
A: HMRC are not that generous. You only receive higher rate tax relief to the extent you would pay higher rate tax (if the pension contribution was not paid). Your client would only pay higher rate tax on £5,000 of her income so this is the extent of the higher rate tax relief she can claim, i.e. (20% x 5,000) £1,000.
Scottish taxpayers will pay the Scottish rate of income tax (SRIT) on non-savings and non-dividend (NSND) income. NSND income includes employment income, profits from self-employment (including sole trades and partnerships), rental profits, and pension income (including the state pension). Similarly, from 6 April 2019 Welsh Taxpayers pay the Welsh Rate of Income Tax (CRIT (C for Cymru)) on NSND income.
Other tax and deductions such as Corporation Tax, dividends, savings income and National Insurance Contributions etc. will remain based on UK rules. This could mean the amount of income tax relief which can be claimed on pension contributions by Scottish and UK tax payers may not be the same. For more info on SRIT and how this works in practice, please visit our facts page. For more info on CRIT and how this works in practice, please visit our facts page.
Q: My client pays more than basic rate tax. Do I reduce their net pension contribution amount by the rate of tax actually paid?
A: Where the Relief At Source method is used (e.g. personal pension and group personal pension schemes) then you only ever deduct the basic rate of tax to find the net pension contribution. So for a gross contribution of £10,000 and using the UK basic rate of 20%, this means a net contribution of £8,000.
The pension provider accepts the £8,000 from the individual and then claims 20% tax relief from HMRC to top this up to £10,000 in the pension plan. Any further tax relief must be claimed by the individual through their self-assessment tax return.
Q: My client is a member of their employer's company pension scheme and pay their personal contribution using the Net Pay method. Do they need to complete a self-assessment tax return to claim the higher rate tax relief due?
A: No. 'Net Pay' means their pension contribution is deducted from their gross income before the balance is taxed. They pay no tax in respect of the deducted amount, meaning full tax relief is achieved up front.
Q: My client pays a rate of taxation which is less than basic rate. What tax relief will they receive on their contribution to a personal pension?
A: Where Relief at Source is used then basic rate tax relief is applied even if you pay less than basic rate tax or no tax at all (up to the limits covered earlier). However, if your client pays their pension contribution by the Net Pay method then they will only receive marginal rate relief. If they pay no tax, they will receive no tax relief.
Q: A personal contribution paid to a pension plan after the individual reaches age 75 does not qualify for tax relief, however, is it tested against their annual allowance?
A: No, these contributions would not be tested against the annual allowance, covered in the Pensions Tax Manual (under the heading ‘what is not included in the pension input amount’).
Q: My client has no relevant earnings and wants to pay the maximum personal contribution allowed in this tax year. I will take an adviser charge from the plan of £360. Can my client pay £3,168 net so she is left with the full £3,600 gross contribution in the plan?
A: No. The tax relief is added before the adviser charge is taken off. The maximum your client can pay to the plan is £2,880. The provider claims 20% tax relief from HMRC meaning this will be grossed up to £3,600 in the plan. If you take your adviser charge from the plan, this will reduce the pension plan value to £3,240.
To achieve your intended result the client would have to pay a net contribution of £2,880 to the plan and your charge direct to you, which would mean a total cost to the client of 2880 + 360 = £3,240. Although you will also need to check if this becomes VATable.
Q: If a husband makes a pension contribution for his wife, does it reduce his adjusted net income?
A: No as it's the wife’s pension (and her bank account if she’s entitled to higher or additional rate tax relief) that receives the tax relief, not the husband. Remember it’s the wife who needs to have relevant earnings to support the contribution amount.
Q: My client has total available annual allowance, including all possible carry forward, of £120,000. His taxable income in the current tax year is £35,000. He has received an inheritance of £95,000 and would like to invest this in a pension using his carry forward. Can he do this?
A: To ensure pension contributions are tax efficient you must consider first tax relief, and second annual allowance rules.
Your client is only entitled to tax relief on a contribution amount up to 100% of relevant earnings in the tax year he pays the pension contribution, i.e. £35,000 gross. A contribution in excess of relevant earnings (where a scheme can accept this) won't receive tax relief but will use up annual allowance.
Q: My client is in receipt of pension income. She does not have any relevant earnings in this tax year and would like to pay £2,880 net (£3,600 gross) for this year, and also £2,880 net for each of the 3 earlier tax years using carry forward. Is this possible?
A: Two points here. Firstly tax relief, you cannot carry forward tax relief from an earlier tax year. Your client would only be entitled to tax relief on a gross contribution of up to £3,600 in this tax year.
Secondly, the term ‘carry forward’ relates to annual allowance only. You need to fully use this year’s annual allowance (standard AA is £40,000) before you can use carry forward. Contributions in excess of 100% of relevant earnings, or £3600 whichever is greater, are not entitled to tax relief but do use annual allowance.
Q: My client is being made redundant. Instead of a taxable redundancy payment of £100,000 the employer is offering my client a pension contribution. Can an employer contribution use carry forward of unused AA from earlier tax years?
A: The AA test is performed against total pension input amounts in the pension input period (since 6 April 2016 this is aligned with the standard tax year). This will be a total of all pension contributions paid by the individual or on their behalf e.g. by their employer or a third party. The client's annual allowance, including all possible carry forward, must be used before any AA excess would arise.
Remember the Tapered AA rules for high income clients, which may impact this type of scenario.
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