Tax Treatment of pension contributions

stamboy

I have tried searching for threads related to this but haven't found anything specific.

What I would like to know is are pension contributions to employers a deductable expense for profits and tax purposes, i.e. are they considered a normal business expense?

If so am I able to give pension contributions to my employees of say £3,600 per year for them without the company or the individuals themselves incurring any additional NI or taxes?

Thirdly, are there any limits on the amount of pension contributions, say a % of their salary or fixed amount p.a.?

Thanks in anticipation

Pennywise

Yes, if your business makes employer contributions to your employees pension schemes, it is tax deductible for you and there are no tax/nic implications on your employees. Just make sure that you pay directly to their pension company - it won't work if you give them money to invest themselves or if you pay their employee contributions for them.

dunstonh

Also remember that from 2012 it will be compulsory for employers to pay into a pension scheme. The current proposed level is 3% of the gross salary. The employee will have to pay 4% and the Government will add 1%.

The employer can choose to use the NPSS or set up their own pension scheme as long as it at least matches or exceeds the NPSS. One advantage of using their own pension scheme is that the NPSS will not benefit from higher rate tax relief. Whereas a group or individual scheme (taking employer contributions) will.

Some employers are already planning for this but many arent even aware that it is coming.

stamboy

Pennywise wrote: »

Yes, if your business makes employer contributions to your employees pension schemes, it is tax deductible for you and there are no tax/nic implications on your employees. Just make sure that you pay directly to their pension company - it won't work if you give them money to invest themselves or if you pay their employee contributions for them.

Thanks is there a limit I can contribute for them, i.e. % of salary or fixed limit?

Thanks

dunstonh

There is no maximum to what you choose to pay. Although if you are planning to exceed 100% of salary you would get restrictions and the employee would if they were to exceed the lifetime allowance which is currently £1.65 million. HMRC would take an interest if the employee (including directors) were to start receiving abnormally high levels of contributions to the pension in relation to the income

Typical levels of employer contribution range from 3% (as it will be from 2012) to 15%.of gross salary. Matched schemes would go some way to avoid any potential query by the HMRC. e.g. if the employer pays 5%, then the employee has to pay 5% as well. Typically these have a cap put on them so not to put a too high liability on the employer.

Debt_Free_Chick

Just to clarify ..... both salary and pension contributions will usually be allowed as a deductible expense, for tax purposes.

However, salary attracts a liability to NIC whereas contributions to registered pension schemes do not.

So if you choose to make contributions to a pension scheme for employees, your only saving is in the NIC - the tax situation is "neutral".

stamboy

Debt_Free_Chick wrote: »

Just to clarify ..... both salary and pension contributions will usually be allowed as a deductible expense, for tax purposes.

However, salary attracts a liability to NIC whereas contributions to registered pension schemes do not.

So if you choose to make contributions to a pension scheme for employees, your only saving is in the NIC - the tax situation is "neutral".

Thanks.

Can it be the employee's own stakeholder pension or does it have to be a specially set-up one?

Debt_Free_Chick

stamboy wrote: »

Thanks.

Can it be the employee's own stakeholder pension or does it have to be a specially set-up one?

It can be either - so long as it's a "registered" scheme and just about every pension plan you come across will be registered. If you want to be safe, ask for the certificate to show that the plan is registered with HMRC.

If you contribute to the employee's own stakeholder, then bear in mind that you will be making payments to several different places. If you have five employees each with their own stakeholder, then that could be five different pension providers. So you will be making a payment each month to five different places. If there are ten ... there could be ten different providers!

It's not as bad as it seems, once you have the systems in place, but bear it in mind.

Incidentally, if you have five or more employees you ought to be offering access to a stakeholder pension plan anyway. There are conditions, but generally, five or more employees and you should be offering access to a stakeholder plan that you - as an employer - have chosen.

HTH

dunstonh

Incidentally, if you have five or more employees you ought to be offering access to a stakeholder pension plan anyway. There are conditions, but generally, five or more employees and you should be offering access to a stakeholder plan that you - as an employer - have chosen.

That rule has just been abolished. I think the act only went through just before Christmas. With the NPSS coming in, there is no need for that.

Can it be the employee's own stakeholder pension or does it have to be a specially set-up one?

It can be stakeholder, personal pension or SIPP. It can be a group scheme or an individual scheme. Or it can be the NPSS from 2012.

Stakeholders are expected to be abolished in 2012 when the NPSS comes in and we will be left with personal pensions and SIPPs. Indeed, the differences between SIPPs and personal pensions is closing all the time so we may just end up with one type by then.

Dont worry about the type of pension at this stage. The fact it is a pension is what matters. What option is best is part of the nitty gritty you work out with your IFA (assuming you would use one for an employer's scheme).

Debt_Free_Chick

dunstonh wrote: »

That rule has just been abolished. I think the act only went through just before Christmas. With the NPSS coming in, there is no need for that.

Immediately? Or only after 2012 with the introduction of Personal Accounts?

Have to admit that I've not followed the detail of the 2008 Pensions Act, but I thought that the changes were effective from 2012, when Personal Accounts were introduced, so that an employer had to contribute to PAs or another "qualifying" scheme.

Will it be the case that all current work-based Stakeholder schemes will need to be replaced by Personal Accounts, PPPs or SIPPS?

:eek:

stamboy

Pennywise wrote: »

Yes, if your business makes employer contributions to your employees pension schemes, it is tax deductible for you and there are no tax/nic implications on your employees. Just make sure that you pay directly to their pension company - it won't work if you give them money to invest themselves or if you pay their employee contributions for them.

So in effect it's treated in the P&L as just another expense similar to salaries, rent, stationery, etc?

How does the company claim the gross-up entitlement for the employee, if it pays the net amount direct to the employees pension fund. Or if it pays the gross top-up how does it claim the adjustment (gross-net) back?

For example Co. X pays £1,000 into Employee A's pension direct.

What are the implications for the employee and company please?

Thanks again