Pension contributions and pension advice

Produced by Tolley

The following Employment Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Pension contributions and pension advice
  • Employee pension contributions
  • The net pay anomaly
  • Employer’s pension contributions
  • Salary sacrifice
  • Business tax treatment
  • Pension advice
  • Advice regarding conversions and transfers of pension scheme benefits
  • Other general pensions advice

Pension contributions and pension advice

Many employees are concerned about their pension provision and will expect their employers to contribute to their pension schemes. Indeed, since the advent of automatic enrolment, most employers are obliged to enrol employees meeting certain conditions within a pension scheme, unless the employee opts out (see the Automatic enrolment ― overview guidance note).

Contributions in respect of individual employees may be made by the employer to an occupational scheme or to a personal pension scheme.

Such contributions are free of tax and national insurance and therefore, many employers offer a salary sacrifice arrangement so that employees forfeit part of their salary and, in exchange, the employer makes an increased pension contribution. For employees subject to 12% Class 1 national insurance, this will make a noticeable difference to their take-home pay without any increase in salary. Given that the employer would pay 13.8% secondary Class 1 national insurance on the salary that the employee would use to make the pension contributions himself, there is also an incentive for the employer to offer this type of salary sacrifice arrangement.

Employee pension contributions

Most pension arrangements also involve employee contributions, with the rates of both employee and employer contribution being determined in terms of a percentage of the employee’s salary. Employee contributions qualify for full tax relief, although there is no equivalent relief from the Class 1 NIC that the employee has suffered on the salary used to make those contributions.

Employee contributions to pension schemes are usually administered by the employer. The employer deducts the pension contribution from the employee's salary and transfers this amount direct to the pension provider.

The amount deducted depends on the type of scheme:

  1. occupational scheme ― the employer deducts the gross amount of the contribution

  2. personal pension scheme (including a group personal pension scheme) ― the employer deducts the net amount of the contribution (ie gross contribution net of basic rate tax)

Employees with a higher or additional marginal rate of tax can

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