View the related Tax Guidance about Tax relief on pension contributions
Tax relief for pension contributions
Tax relief for pension contributionsThe completion of boxes 1 to 4 at the top of page TR4 of the main tax return allows a taxpayer to claim tax relief on pension contributions made in the tax year.Most contributions to registered pension schemes are paid net of basic rate tax relief (via a relief at source scheme), so the only additional relief sought by entry on the tax return is relief at higher rates of tax.For Scottish taxpayers, relief at source is at the Scottish basic rate. From 2017/18 onwards, due to the divergence in the Scottish bands and rates from the rest of the UK, multiple bands need to be extended where pension contributions are paid to relief at source schemes. Scottish tax bands need to be extended for calculating tax on non-savings, non-dividend income. UK tax bands need to be extended for calculating tax on savings and dividend income of Scottish taxpayers. This is discussed further below.Contributions are paid gross to occupational schemes that use a net pay arrangement.For the meaning of a registered pension scheme, relief at source scheme and net pay arrangement, see the Pensions glossary of terms guidance note.The tax relief available for pension contributions is summarised in the Flowchart ― tax relief for contributions to a UK registered pension scheme.Conditions for tax relief to be claimedRelevant UK individualTo obtain tax relief on pension contributions, the scheme member must be a relevant UK individual. This means that the individual must:•have relevant UK earnings chargeable
Pensions and divorce ― marriage or civil partnership breakdown
Pensions and divorce ― marriage or civil partnership breakdownWhen a married couple divorces or a civil partnership is dissolved, there is likely to be a sharing out of the assets belonging to the former couple.Accrued pension benefits, whether in a defined contribution or defined benefit pension scheme, may be a major asset. With the automatic enrolment of many employees into workplace pensions, this is only likely to increase.If either or both of the parties to the marriage or partnership have accrued pension rights, then these are viewed by the court as part of the former couple’s assets for disposition on divorce. In Scotland, the process is different and, for example, only pension rights built up during the marriage are shared (see McDonald). If a prenuptial agreement is in place, and if it was freely entered into by each party with a full appreciation of its implication, the courts may uphold it, unless it would not be fair to hold the parties to it. While it is outside the scope of this guidance note to discuss the validity of prenuptial agreements, you should note that the existence of such a document could impact on pension arrangements on a break-up.In this guidance note ‘marriage’ applies similarly to civil partnerships, ‘divorce’ applies similarly to the dissolution of a civil partnership and ‘spouse’ applies equally to a civil partner.Some of the other terms used are explained in the Pensions glossary of terms guidance note.As with all pensions matters, considering the impact of divorce
Pension contributions and pension advice
Pension contributions and pension adviceSince automatic enrolment was implemented, 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 NIC. 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, this will save tax and NIC on the salary they would otherwise receive. Where this replaces a personal contribution by the employee, they will save NIC at the appropriate rate (see the Overview of NIC Classes, rates and thresholds guidance note) depending on their level of earnings on these contributions to the pension. Given that the employer would pay secondary Class 1 NIC on the salary that the employee would use to make the pension contributions on their own behalf, there is also an incentive for the employer to offer this type of salary sacrifice arrangement. See the Salary sacrifice and pensions guidance note.Autumn Statement 2023 ― pensions reformIn the Autumn Statement 2023, the Government announced a whole suite of policies around pensions reform. This includes publishing nine documents including consultation outcomes, calls for evidence and research and analysis papers. These cover a wide range of issues on pensions around how to make it easier for individuals to
Member pension contributions to registered pension schemes
Member pension contributions to registered pension schemesIntroductionFor many years, the UK has operated a system which encourages private pension provision through a system of tax reliefs.The operation of the taxation system associated with pensions was radically reformed in Finance Act 2004 which effectively disposed of a complex system that had developed since the last occasion of radical reform in 1970. This new basis was introduced with effect from 6 April 2006 as a consequence of the provisions contained in Finance Act 2004.The registered pension scheme rules will specify who can join it. There are no HMRC restrictions on who is allowed to join a specific scheme and even non-UK residents may join a registered pension scheme if
Employer obligations for those running a small payroll
Employer obligations for those running a small payrollPAYE procedures applicable for new or smaller employersThis guidance note sets out a number of payroll considerations which may be particularly relevant for new or smaller employers, and provides appropriate signposting where additional guidance may be found. Whilst most general PAYE tax and NIC rules apply equally to all employers, there are certain rules and processes which are more likely to be relevant when starting a new payroll, especially if this is a smaller employer.In making payment to an employee, the PAYE treatment of an item (ie whether or not the payment is subject to tax deduction) is usually matched by the NIC treatment, however this is not always the case. In addition, the methods by which PAYE tax and NIC are actually calculated differ. This document highlights some of the key differences.For additional explanation of some of the terms used in this and other guidance notes relating to payroll matters, see the A–Z of payroll guidance note. Simon’s Taxes Division E4.11 also provides a more detailed analysis of the common employer payroll PAYE and NIC deduction reporting and payment obligations. Much of HMRC’s general views on how PAYE should be applied is spread across the GOV.UK site. However, for a more definitive and consolidated technical view on how HMRC believes particular payments should be treated, reference may be made to the CWG2 further guide to PAYE and National Insurance contributions.Basic principles of the PAYE systemIs the person hired an employee?On basic
Annual allowance
Annual allowanceThis guidance note considers the legislative and practical limits on member and employers contributions to registered pension schemes.Though in principle, there is here is no limit on the amount that can be invested in a registered pension scheme by a member or by their employer, in practice contributions will normally be restricted to the amount on which tax relief is available.Following abolition of the lifetime allowance from 6 April 2024, a number of factors impact this decision:•there is an annual maximum to the tax relieved contributions which can be invested (and/or the value attributed to increases in scheme benefits for defined benefits pensions). This is called the annual allowance•where the value of a fund (or the scheme benefits for defined benefits pensions) exceeds the lump sum and death benefit allowance, the tax payable on withdrawals/ benefits may be increased•there can be restrictions on the maximum tax-deductible employer contribution, if these exceed amounts wholly and exclusively for the purpose of the trade. Such considerations are particularly like to affect owner managed businessesBefore abolition, the lifetime allowance limited impacted the total tax-relieved value that could be accumulated into registered pension schemes. Its operation and the lifetime allowance charges that could have arisen before 6 April 2023 are discussed in the Lifetime allowance guidance note. Significance of the annual allowanceThe annual allowance limits the maximum tax-relived pension contributions in each tax year. It applies for a pension input period, which, since 5 April 2016, is the tax year.
Treatment of pension contributions to non-UK pension schemes
Treatment of pension contributions to non-UK pension schemesSTOP PRESS: The remittance basis is to be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. The legislation is included in Finance Bill 2025. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.Where an individual comes to the UK to work, they may wish to continue contributing to their existing non-UK pension scheme.There are a number of ways in which a member of a non-UK scheme may obtain UK tax relief for contributions made by them or on their behalf:•migrant member relief (see ‘Migrant member relief’ below)•transitional corresponding relief, which is an extension of the relief that preceded migrant member relief before 6 April 2006 (also known as A-day) and applied if the foreign pension scheme corresponded to a UK approved pension scheme (see ‘Transitional provisions ― members previously subject to corresponding relief’ below)•under the provisions of the relevant double tax agreement (see ‘Relief under double tax agreements’ below)•exemption from the benefit in kind legislation under ITEPA 2003, s 307 where there is a cost to the employer in relation to funding a pension, annuity, lump sum or any similar benefit that is payable on the death of the member. See EIM21800 for more detailsPTM111100Usually the migrant member relief provisions will be considered
Employer contributions to registered pension schemes
Employer contributions to registered pension schemesIntroductionFor many years, the UK has operated a system which encourages private pension provision through a system of tax reliefs.The operation of the taxation system associated with pensions was radically reformed in FA 2004, Pt 4, which effectively disposed of a complex system that had developed since the last occasion of radical reform in 1970. This new basis was introduced with effect from 6 April 2006 through the provisions contained in FA 2004.The rules of any registered pension scheme will specify who can join it. There are no HMRC restrictions on who is allowed to join a specific scheme, even non-UK residents may join a registered pension scheme if the scheme rules permit.Contributions may be paid by the scheme member, a third party on behalf of the member, or a member’s employer or former employer. Where a third party pays a contribution, those contributions are treated as if they had been paid by the member, ie they count towards the member’s annual allowance.Pensions taxation lifecycleThe taxation life-cycle of private pension arrangements can be divided into three stages. At each point, there are tax implications for the member and, where applicable, the member’s employer. For further details see the Taxation of pension contributions - overview guidance note.Tax relief on employer contributions and
Pension contributions by owner managed companies
Pension contributions by owner managed companiesThe tax treatment of pension contributions is complicated and can require specialist advice. This guidance note summarises the treatment of pension contributions into a registered pension scheme by owner managed companies and the relevant restrictions or planning points which apply.For more detailed information on registered pension schemes, see the Taxation of pension contributions ― overview guidance note.Unless advisers are suitably qualified and authorised to give investment advice, it is vital that they do not give investment advice of any sort. This includes advice concerning pensions. Advice should be restricted to the tax consequences of making contributions. For further information, see the Regulated investment advice guidance note.Advantages of registered pension schemesThere are several advantages to using registered pension schemes to extract profits for owner-managed businesses:•taxpayers receive a measure of tax relief on pension contributions which they personally make to their pension schemes (see ‘Member contributions ― methods of tax relief’ below)•employer contributions are allowable deductions from trading profits to the extent that they are wholly and exclusively for the purpose of the trade. See the Allowable deductions for employee-related expenses guidance note•employer contributions are n tax and NIC free benefit from the employee’s perspective (see below)•the scheme does not pay income tax on interest / dividend income or CGT on capital gains generated from its investments. See the Taxation of pension contributions ― overview guidance note•on retirement taxpayers can draw a tax-free lump sum from the scheme (which may be
Reporting requirements for non-registered pension schemes
Reporting requirements for non-registered pension schemesIntroductionThe non-registered pension schemes, in respect of which there are reporting requirements to HMRC, covered by this note are:•employer financed retirement benefit schemes (EFRBS)•qualifying overseas pension schemes (QOPS) in respect of migrant member relief•transfers from non-UK pension schemes to registered pension schemes•qualifying recognised overseas pension schemes (QROPS), which should not be confused with QOPS as the two have different conditionsEmployer financed retirement benefit schemes (EFRBS)An EFRBS is a unregistered pension scheme for the provision of relevant benefits to employees or former employees of an employer. These are benefits provided in connection with retirement or death or in relation to a change in the nature of an employee’s service. As unregistered pension schemes, EFRBS are not subject to the normal pensions taxation regime. Therefore, contributions to an EFRBS are not subject to the annual allowance and benefits from an EFRBS are not tested against the recipient’s lump sum allowance or lump sum and death benefit allowance (or, prior 6 April 2024, the recipient’s lifetime allowance).For full details of EFRBS, including the tax treatment, see the Employer-financed retirement benefit schemes (EFRBS) ― overview and Employer-financed retirement benefit schemes (EFRBS) and disguised remuneration guidance notes.The fact that the scheme is unregistered does not mean that there are no requirements placed on the EFRBS by HMRC. The EFRBS must provide information to HMRC:•when the EFRBS comes into operation•when benefits are provided from the EFRBS (information must be provided annually)FA 2004, s 251(1)(a),
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