There is no National Insurance (NI) payment due on a company pension contribution as a benefit in kind. The pension contribution made by the employer can be unlimited; however, if it exceeds the employee’s annual contribution allowance, the employee can face a tax recovery charge.
Reduce Tax and Save Your Personal Allowance
In 2011/12, the level of annual allowance and therefore maximum contribution is £50,000. An individual or employee can have 100% of salary capped at £50,000 as a maximum. The annual allowance includes employee and employer contributions.
If the individual pays into a personal pension scheme, his contribution is paid net and HM Revenue and Customs (HMRC) uplifts this by 20%. The individual can claim further tax relief at 20% if a 40% taxpayer, and 30% more if a 50% taxpayer. If a company or employer pays, this is a gross contribution and there is no HMRC uplift.
If you earn over £100,000 then you lose the personal allowance on a ‘one for one’ basis up to £114,950. Pension contributions can bring your taxable income down to below £100,000 and retain the personal allowance (from £7,475 to £9,940), increasing your tax reliefs to 60%.
You can reduce taxable income significantly through pension contributions, and also reduce the cost of contributions. For example, if earning £120,000 and contributing £21,000 gross (of this HMRC pays in £4,200), you will also get back another £4,200 in tax relief at 20%, and save your personal allowance.
If a spouse has no earnings and is not employed then a maximum of £3,600 gross (£2,880 net) can be contributed for the spouse. If the spouse is employed, then the 100% of salary rule applies, capped at £50,000. Either the individual or employer or both can contribute, with employer contributions being unlimited, but guided by the 100% of salary rule, so as not to incur excess funding charges.
A good tip is to employ the spouse up to the level where NI is payable and pay 100% of salary to a pension fund, which will grow tax free.
Carry Forward for More relief
You can also carry forward unused contributions from the last 3 years (from the 2008/09 tax year) and add the current year’s contribution, thus contributing £200,000. You must have had a scheme in place during those years of carry forward. If earning more than £130,000 in the previous two tax years, you will be limited to £20,000 per year for those years.
Do the sums to see how much you can carry forward. Then adjust your ‘pension input period’ in this tax year to claim up to an additional £50,000 now for the following tax year. This may help companies wishing to speed up pension provision, but to also get the contribution tax relief in this accounting period to reduce tax and increase profits. The employee must have the relevant earnings to do so. As always, specific professional advice is strongly recommended.
By Tony Granger