Pension contributions

Conditions

1. Employer contributions (limited company, or a sole trader with employees): HMRC's guidance says employer contributions are deductible as an expense where they are incurred wholly and exclusively for the purposes of the employer's trade or profession — under the Income Tax trading rules for a sole trader and the Corporation Tax rules for a company (PTM043100). A company with investment business rather than a trade deducts them as an expense of management instead (PTM043100).
2. Directors and connected employees: HMRC's guidance tells its officers to accept that the contributions are paid wholly and exclusively for the trade where the remuneration package for a director of a close company, or an employee who is a close relative or friend of the director or proprietor, is comparable with that paid to unconnected employees performing duties of similar value (BIM46035). When there are no employees whose duties are genuinely comparable — for example, a company whose only employee is the director — HMRC's guidance is to follow its general guidance on remuneration instead (BIM46035): a payment does not fail the wholly and exclusively test if there is no non-trade purpose to it and the amount is not determined by the relationship, and remuneration that exceeds a reasonable level of reward for the value of the work the individual does for the employer, on a commercial basis, is evidence that it may not be a genuine trade expense (BIM47105). Where a package is excessive for the value of the work, HMRC considers the overall remuneration package, not simply the amount of the pension contribution, and where only a definite part or proportion is not wholly and exclusively for the trade, only that part or proportion is disallowed (BIM46035). Whether a particular package passes depends on its facts, so take advice from an accountant on a large or unusual contribution.
3. Timing: an employer's contribution can only be deducted for the period of account in which it was paid — it cannot be carried back or forward, and tax relief can only be given on contributions that have actually been paid, not on an amount accrued in the accounts (PTM043200). Contributions are not treated as capital payments even where they otherwise would be (PTM043100). Relief on large contributions may be spread forward into later periods (PTM043200).
4. Your own contributions (sole trader, director or employee): these get tax relief as a member of the scheme if, in the tax year the contribution is paid, you are an active member of a registered pension scheme and a relevant UK individual (PTM044100). Relief is limited each tax year to the amount of your relevant UK earnings chargeable to Income Tax for that year, increased to a basic amount of £3,600 (2026/27) if your earnings are lower than that or nil, but relief on contributions above your earnings, up to £3,600, can only be given if the scheme operates relief at source (PTM044100). Contributions paid after you reach 75 get no relief, and the limit can be reduced if you make a foreign income claim or a foreign employment claim (PTM044100) — take advice from an accountant if either applies. HMRC's manual lists three methods, and the scheme, not you, determines which applies: relief at source, where the scheme administrator recovers the tax relief and adds it to your pension fund; a net pay arrangement, where your employer deducts your contributions from your gross pay before Income Tax is calculated; or a claim to HMRC, where the contribution is deducted from your total income and shown on your Self Assessment (PTM044210). Under relief at source, if you pay Income Tax above the basic rate you claim the additional relief yourself, for example on your Self Assessment tax return (GOV.UK). For a sole trader this is how relief on your own pension is given: the legislation for deducting employer pension contributions in computing trading profits applies only to contributions made by employers and former employers (BIM46070).
5. This earnings-based limit is a limit on relief for your own contributions. Contributions paid by your employer do not qualify for tax relief for you as the member (PTM044100), so that limit does not cap a company's contribution for its director — but the company's contribution must still pass the wholly and exclusively test above, and it counts towards the director's annual allowance.
6. Annual allowance: the most you can save in your pension pots in a tax year before you have to pay tax. It is £60,000 for 2026/27 (GOV.UK), and it counts the total paid in to a defined contribution scheme by you or anyone else, including your employer, and any increase in a defined benefit scheme. If you use all of your annual allowance for the current tax year, you might be able to carry over annual allowance you did not use in the previous 3 tax years (GOV.UK), but only from a year in which you were a member of a registered pension scheme (PTM055100). How much is available depends on what was paid in, and which allowance applied, in each of those years, so check it against your pension statements or with an accountant before relying on it. Your annual allowance might be lower if you have flexibly accessed your pension pot (the 'money purchase annual allowance') or have a high income (a 'tapered' annual allowance) — check GOV.UK's annual allowance guidance if either applies.
7. If you are an employee, there is nothing to claim as an expense: no liability to Income Tax arises in respect of earnings where your employer makes contributions under a registered pension scheme in respect of you (ITEPA 2003 s308), and your own contributions are relieved by one of the three methods above.

Common mistakes

• A sole trader putting their own pension contributions through the business accounts as an expense, instead of getting relief on them personally through relief at source or a Self Assessment claim.
• Treating an employer contribution as deductible in the year it is accrued in the accounts — relief is given for the period of account in which it is actually paid.
• Assuming the earnings-based limit on relief caps what a company can pay in for its director — it limits relief on the director's own contributions, while company contributions count towards the annual allowance and must be wholly and exclusively for the trade.
• Ignoring the annual allowance, which counts employer contributions as well as your own.
• Assuming there is still a 'lifetime limit' on the size of a pension — the lifetime allowance was abolished on 6 April 2024. Separate allowances now limit tax-free lump sums, not the total pot.

What to keep

• Pension contribution statements.
• For companies, board records of employer contributions and evidence of the date each contribution was paid, since relief follows the period of account in which it is paid.
• For a director or connected employee, a record of how the overall remuneration package was set: how it compares with what unconnected employees doing similar work are paid or, where there are none, how it reflects the value of the work the individual does for the business.

Real-world example

A company makes an employer pension contribution for its director as part of their remuneration, paying it into a registered pension scheme a week before its year end. The company also employs an unconnected manager whose duties are of similar value, and the director's overall package is comparable with the manager's, so HMRC's guidance is to accept the contribution as wholly and exclusively for the trade (BIM46035); because it was paid before the year end it is deducted in that period of account (PTM043200). Had the company only accrued it in that year's accounts and paid it after the year end, relief would fall in the later period instead. The contribution counts towards the director's annual allowance.

Frequently asked