Pension contributions

Produced by Tolley
  • (Updated for Budget 2021)
Pension contributions

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Pension contributions
  • Advantages of registered pension funds
  • Maximum contributions
  • ‘Relevant earnings’
  • Annual allowance
  • Money purchase annual allowance (MPAA)
  • Pension input periods (PIPs)
  • Pension input amount (PIA)
  • Carry forward of annual allowances
  • Lifetime allowance
  • More...

The tax treatment of pension contributions is complicated and has seen significant change in recent years. For more detailed information, please see the guidance in the Employment Taxes module starting with the Pension scheme types and / or the Personal Tax module Pensions glossary of terms and Tax relief for pension contributions guidance notes.

For details of pensions schemes prior to 5 April 2006, see Simon’s Taxes E7.222.

Advantages of registered pension funds

There are several advantages to using registered pension funds:

  1. pension funds do not pay income tax on interest / dividend income or CGT on capital gains generated from fund investments

  2. taxpayers can draw a tax-free lump sum from the fund on retirement (normally up to 25% of the fund’s value)

  3. taxpayers receive a measure of tax relief on pension contributions which they make to their pension funds

  4. employer’s contributions into employee pension funds are allowable deductions from trading profits to the extent that they are wholly and exclusively for the purpose of the trade

  5. employer’s contributions into employee pension funds are a tax-free benefit

For guidance on tax relief for employer contributions and non-registered schemes, see ‘Employee tax relief for contributions’ below.

Maximum contributions

The maximum contribution to a pension fund that a taxpayer can obtain tax relief for in any one tax year is the higher of 100% of his ‘relevant earnings’ for that year and the basic amount (£3,600). However, contributions over the annual allowance (see below) are subject to a charge. There is also a lifetime limit (also discussed below).

Anybody can pay up to £2,880 per year into a pension scheme regardless of the level of his or her earnings. Up to this limit, the pension scheme will claim basic rate tax relief. Grossing up for 20% basic rate tax, this means that the gross contribution is effectively £3,600.

Contributions are not permitted by taxpayers over the age of 75.

Contributions can be made by the scheme member, a third party on the member’s behalf

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