Home > Corporation Tax > Understanding Pension Contributions

Understanding Pension Contributions

By: J.A.J Aaronson - Updated: 5 Mar 2014 | comments*Discuss
Pension Contributions Corporation Tax

Companies are constantly looking for ways in which they can lessen their tax burden. For public limited companies and incorporated associations, Corporation Tax can see as much as 21% of their profits paid straight back out again in tax (from April 1st 2015, this will be 20%), and so it is vital that organisations make as effective use as possible of the numerous forms of relief available.

One of the key ways in which organisations can cut their corporation tax liability is through claiming tax relief on any allowable payments that they have made during the course of the previous tax year. The list of those payments against which organisations that are liable for corporation tax can apply for a reduction of their tax bill is long and the rules can be complex, but one of the most frequently incurred expenses is pension contributions.

Approved and Unapproved

In the first instance, it is important to note that there are two distinct types of pension plan: approved and unapproved schemes. Essentially, approved schemes have been designed with the input of HM Revenue & Customs (HMRC), and therefore carry with them all of the benefits and drawbacks of the pensions tax schedule. Unapproved schemes have been designed without HMRC's input, and frequently do not benefit from some of the relief available to members of approved schemes. (For more information, read our article Understanding Tax Relief.)

An employer will generally only be able to make a claim for tax relief on pension contributions that have been made to an approved scheme. Many employers offer occupational pension schemes, and it is highly likely that the majority of your employees will wish to contribute to approved schemes anyway. The exception to this tends to be working directors or shareholding directors. Unlike employees, who suffer from an upper limit of tax relief available annually on pension contributions, employers can claim unlimited tax relief on contributions. This can have significant implications for tax planning, particularly in the case of working directors who have control over their own levels of pension contribution.


On April 6 2006 (known as A-Day), the tax regime for pensions was completely overhauled. After this point, in order to qualify for tax relief, any pension contributions are now required to meet the conditions normally applied to any other business expenditure; that is, they must be incurred 'wholly and exclusively' for business purposes. This is the case for trading companies, while companies that engage in investment activities must be able to show that their pension contributions meet the criteria for management expenses. Thus, pension contributions can be seen simply as another business expenditure that must be accounted for when calculating your profits chargeable to corporation tax.

HMRC has also made guidance available concerning how the test of 'wholly and exclusively' applies specifically to pensions. They say that there must be a viable business reason if pensions paid to shareholding employees are higher than those paid to non-shareholding employees of a similar value to the company. Furthermore, if an employee seems to have a comparatively low salary but a high level of employer's pension contributions, it must be proved that this is not as a result of National Insurance liability planning.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
What about the professional fees incurred by the SME in setting up the pension and matching the investments against the beneficiaries' risk preferences. Are these fees deductible against UK corporation tax?
Roger - 18-Apr-11 @ 5:11 PM
Share Your Story, Join the Discussion or Seek Advice...
(never shown)
(never shown)
(never shown)
(never shown)
Enter word:
Latest Comments
  • mike
    Re: What is My Tax Code?
    I currently earn £27160 yearly and just got a second job for an agency earning around 140 a week what will my tax code change to.
    15 September 2020
  • Robbie
    Re: Should I be Paid Mileage Allowance?
    I worked for a company they agreed to pay me 20p per mile and I’ve submitted all the expense forms but they haven’t paid…
    10 September 2020
  • tiff
    Re: How Will My Second Job Be Taxed?
    i currently work 40 hours a week on £20,000 a year, but have taken on part time employment which is 15 hours a week on…
    8 September 2020
  • ade
    Re: How Will My Second Job Be Taxed?
    I have got a full time job , I earning 33000 a year and I started a part time self employed job last month hoping to earn…
    25 August 2020
  • pseagraves
    Re: Should I be Paid Mileage Allowance?
    I am receiving a small car allowance however my employer is only reimbursing 9p a mile based on an APR rate. Am I right…
    10 August 2020
  • Jas
    Re: How Will My Second Job Be Taxed?
    Hi I have 2 jobs my first job I get paid 1150 second job paid 362 after tax it is BR tax but I'm sure on both my jobs I am…
    2 July 2020
  • Stig
    Re: What is My Tax Code?
    I recently got moved on to a k2600 tax code. My earnings have increased and I now get a fully fuelled car. My earnings prior to this were…
    19 June 2020
  • Legend
    Re: Should I be Paid Mileage Allowance?
    Hi my company are not paying me mileage I'm doing 84 miles a day.They provide me with a works van but can I still claim…
    3 June 2020
  • Caramel
    Re: How Will My Second Job Be Taxed?
    I currently have a full time job and wonder if I get a second job, is it worth it? If earning under 40k (doing both jobs and…
    30 May 2020
  • Dee
    Re: How Will My Second Job Be Taxed?
    I'm currently working full-time, as from next week I will be going part-time, and at the same time starting a new part-time…
    6 May 2020