Contributions can normally be paid by the member, a third party on behalf of the member or a member’s employer or former employer. Where a contribution is paid by a third party, this is treated as if it were paid by the member which means that the member (rather than the contributor) receives any relevant tax relief.

The third party can be an individual, a corporate body or other legal entity. Although contributions can be paid, they will only qualify for tax relief where the relevant conditions are met.

An individual can, in principle, have tax relief in the tax year in which the contribution is paid provided they are an active member of a registered pension scheme and are a relevant UK individual. The amount of the member’s contribution on which tax relief is granted is known as a relievable contribution.

Although an employer contribution to a registered pension scheme is being made to fund a benefit in kind, tax will not normally be paid unless the member’s annual allowance is exceeded. Tax relief on employer contributions is provided by treating the contribution as a business expense.

Further details on the definition of relievable contributions and what is a relevant UK individual are provided below.
The following information may also be useful for those seeking pension planning advice on how contributions can be made and what forms are accepted.

Form of contributions

Generally, contributions must be paid as cash sums, such as a deduction from a member’s salary, cheques, bank or building society drafts, direct debits, standing orders, faster payments and debit/credit cards.

In limited circumstances tax rules allow a contribution of shares. These shares must be shares:

  • which the member acquired on exercising a right under a SAYE option scheme (as defined in section 516 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)) or
  • which were appropriated to the member under the provisions of a share incentive plan (as defined by section 488 ITEPA 2003).

There are also certain legislative rules worth noting as part of comprehensive pension planning advice.

Specific circumstances

Legislation introduced in 2003 meant that the employee paid neither tax nor national insurance contributions on the pension contribution paid by their employer to the registered scheme of one or more of their relatives. An added advantage was that such a contribution was not set against the employee’s lifetime allowance or annual allowance. This allowed family pension plans to be set up.

Legislation was included in the Finance Act 2013 restricting the employee’s income tax exemption to employer pension contributions paid to the employee’s registered pension scheme, rather than contributions made to any registered scheme. This change was effective from 6 April 2013.

A contribution made by a cheque drawn on a business account or a partnership account (or by a direct debit, standing order or electronic payment from either of those accounts) can be accepted as a contribution paid by the member in exactly the same way as if the individual had paid it from personal resources.

In such a case, the business would need to confirm, in writing, that the member has reimbursed the amount. Where a payment is made from a partnership account, the partnership will need to confirm, in writing, that the payment has been made from the member’s share of the partnership profits.

The details below provide further pension planning advice on eligibility and tax relief limits for contributions.

Relievable contributions and relevant UK individuals

Any member of a registered scheme may make unlimited contributions to the scheme during a tax year. However, to qualify for tax relief in principle, the contribution must be a “relievable pension contribution” made by a “relevant UK individual” or by a third party on behalf of the individual member.

A “relievable pension contribution” is a contribution paid to a registered scheme by, or on behalf of, a member. It is not a “relievable pension contribution” if it falls in one of the following categories:

  • it is paid after the member has reached age 75;
  • it is a contribution paid by the individual’s employer (irrespective of the member’s age at the time the contribution is paid);
  • it is age related rebates or minimum contributions paid by HMRC is respect of a member who had contracted out (not available since 6 April 2012);
  • life assurance premium contributions paid after 5 April 2007 (or 31 July 2007 in respect of occupational pension schemes).

Tax relief is available on contributions made by individuals up to the higher of 100% of relevant UK earnings and £3,600 gross and is further restricted by the annual allowance.

Contributions paid by the individual’s employer are not restricted by the individual’s relevant UK earnings or annual allowance – but employer contributions in excess of the individual’s annual allowance will result in an annual allowance tax charge on the individual.

A “relevant UK individual” is an individual in the tax year concerned if they:

  • have “relevant UK earnings” chargeable to income tax for that tax year;
  • are resident in the UK at some time during that tax year;
  • were resident in the UK at some time during the five tax years immediately before the tax year in question and they were also resident in the UK when they joined the pension scheme; or
  • have earnings from overseas Crown employment (or is the spouse or civil partner of such an individual). Crown employment as defined by section 28 of the Income Tax (Earnings and Pensions) Act 2003.

For more personalised pension planning advice based on your circumstances, please contact one of our advisers.

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It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future.

It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within the blog is for information purposes only and does not constitute financial advice.

The purpose of the blog is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.