Types of pension contributions

1. Contribution types

There are two types of pension contributions:

Personal contributions – which can be paid by:

• The investor
• A 3rd party
• A partnership account*
• A sole trader account*

* If the payment is made by a partner of the partnership or the sole trader themselves this is classed as a self-employed payment and therefore is the same as being paid by the investor.

Employer contributions – which can be paid by:

• A limited company
• A partnership account**
• A sole trader account**

** If the payment relates to an employee that is neither a partner in a partnership or the sole trader themselves.

2. Personal contributions

Personal contributions are entitled to tax relief. Tax relief is given via one of three different methods:

• By deducting from gross income before tax is paid (net pay)
• By making a gross payment and claiming money back from HMRC directly (claims)
• By having tax relief added to your pension (relief at source).

Quilter operates on a relief at source basis giving basic rate tax relief up front. Any higher and additional rate tax relief needs to be reclaimed via self-assessment.

To receive a tax relievable contribution, the recipient must have sufficient relevant UK earnings to cover the gross contribution. The maximum personal contribution that can be made is to us is up to100% of the recipients relevant UK earnings or £3600, whichever is higher.

The tax relief is based on the recipient’s tax bracket, not the payers.

3. Employer contributions

Employer contributions do not get tax relief within the pension, but instead can get tax relief within the business. This is done by offsetting contributions against the employer’s tax bill as a business expense.

Regardless of whether the employer is a sole trader, partnership or limited company, any pension contribution that is claimed as an expense needs to be wholly and exclusively for the purpose of the business to be able to be offset against the tax bill.

4. Wholly and exclusively

Whether a pension contribution is wholly and exclusively for the purpose of the business should be checked with their accountant. As a rule of thumb, for an owner director, the total package including the pension contribution should be comparable to someone in a similar position who is not an owner director.

Guidance says ‘You should accept a deduction for remuneration that is commensurate with the duties undertaken and at the rate payable on an arm’s length basis by comparable employers.’ BIM37707 - Wholly and exclusively: duality of, or non-trade: remuneration, etc: ‘excessive’ remuneration: establish the purpose - HMRC internal manual - GOV.UK (www.gov.uk)

5. Further HMRC guidance

Further guidance on wholly and exclusively rules can be found in HMRC’s Business Income Manual.

BIM37000 - Wholly and exclusively: contents - HMRC internal manual - GOV.UK (www.gov.uk)

BIM46030 - Specific deductions: pension schemes: wholly & exclusively: introduction - HMRC internal manual - GOV.UK (www.gov.uk)