Pension contributions to approved pension funds on behalf of employees and directors continue to be a tax-free benefit provided the annual input limit is not breached.

The contributions are also deductible for the employer provided incurred wholly and exclusively for the purposes of the trade and paid before the end of the accounting period of the business. For most taxpayers, the annual input limit is £40,000 and this limit includes contributions by the employee and contributions made by the employer on their behalf. It is also possible to take advantage of unused relief from the previous three fiscal years.

Payments into the pension by the employing business will be deductible against business profits. Currently this will only save 19% Corporation Tax, but from 1 April 2023 will save 25% where profits exceed £250,000 and 26.5% where profits are between £50,000 and £250,000. Note that these limits are divided by the number of associated companies, i.e. under common control.

There are provisions for exceptionally large contributions where the deduction is spread over 2, 3 or 4 years. Although the contribution on behalf of the employee or director may be tax free, they are generally not able to access the fund until age 55. There have been several “schemes” devised over the years to exploit the pension rules.

HMRC warn employers not to use Unfunded Pension Arrangements HMRC are currently attacking a marketed tax avoidance scheme using unfunded pension arrangements to avoid Corporation Tax, Income Tax and National Insurance contributions. HMRC strongly believes these arrangements do not work and will seek to challenge anyone promoting or using these arrangements and make sure the correct tax is paid.

The arrangements involve a company creating an unfunded pension obligation to pay one or more of their directors a pension. This is to create an expense in the company accounts to reduce the company’s profit. The intended result of this step is to reduce the amount of Corporation Tax payable. With many of these arrangements, the company then transfers the pension obligation to a closely associated third party. The third party is usually a relative or colleague of the director due to receive the pension.

The intended result of this step is a payment to the director or a closely associated third party, with no immediate liability to Income Tax and National Insurance contributions. Users of these arrangements may pay considerable fees to use them, yet may still have to repay the tax claimed to be avoided, as well as interest and a penalty. Disguised remuneration: tax avoidance using unfunded pension arrangements (Spotlight 58) – GOV.UK (