How to claim pension contributions as business expenses in the UK? Pension contributions are like saving plans to support a company’s employees after retirement. Generally, a limited amount from an employee’s pay is deducted and saved as a pension contribution. The company also adds to this amount and pays it to the employee at the time of retirement. In today’s discussion, we will discuss how to claim pension contributions as business expenses in the UK. Carry on reading to gather more information.
How Do You Claim Pension Contributions as a Business Expense in the UK?
A pension contribution in the UK refers to the amount an employer pays periodically into an employee’s account as a pension fund. In the UK, all employers must contribute to the pension fund of their employees. A company must design a pension contribution strategy if it complies with all the following:
- The employee is classed as a worker in the company
- The age of the employee is between 22 years and state pension age
- The yearly earnings of employees are £10,000
- The individual is working in the UK, or the company is operating in the UK.
What is the Tax on Pension Contributions?
In the UK, pension funds are usually exempted from the tax to a certain limit, thus benefitting people after their retirement. All pension providers must register themselves with HMRC. The tax-free pension contributions include:
- Workplace pensions
- Personal or shareholder pensions
- Overseas pension contributions that come under the umbrella of UK tax-free pension contributions.
What is the Limit to Tax-Free Pension Contributions?
Tax is imposed on pension funds if they go above certain limits, such as:
- If your pension funds go above 100% of your earnings in a financial year
- Above £60,000
- If the pension provider is not registered with HMRC
- And if your pension provider does not follow HMRC rules, obviously then you must pay the imposed tax
Deducting Pension Contribution Tax
There are two scenarios: if you are self-employed or if you are employed in a company as a director. If you are self-employed, then your pension fund comes under tax relief from the government. This is because pension funds are not a business cost; hence, tax is not imposed on them. However, the individual can claim tax relief on such amounts. To avail of tax relief from the government, you must mention the pension amount separately under the tax relief section while filing the tax return.
Most of the time, people get a 25% bonus as tax relief. In case you are a basic rate taxpayer, the UK government will pay back £25 for every £100 paid. If you are a high-rate taxpayer, then you can claim additional relief on your tax return. If you are the director of a limited company, you can still add pension funds to your account through the proper channel of the company. You should follow the same rules of pension funds as other employees of the company.
Your pension contributions as a limited company director are not included in your business capital and are exempted from the standard tax rate. It is notable that if you have not paid corporation tax, then you are not eligible for a bonus pay rate of £25 given by the government on every £100 paid.
If you are not paying for pension funds for any legitimate reason and someone else is paying on your behalf, then you get a 20% tax relief from the UK government if the person paying on your behalf claims this tax relief for you. This claim in tax relief must be sent to HMRC for a pension contribution over £10,000.
What will Happen If You Do Not Pay Income Tax?
If you are not a taxpayer, you still get a relief of 20% from the government for a pension contribution amount of £2880 in each tax year, i.e. from 6th April to 5th April of next year, if following conditions are fulfilled:
- You skip tax return each year because you are on low income
- The pension provider claims tax relief of 20% on your behalf.
What are the Factors Examined by HMRC?
If you are a company director and registered with HMRC in the UK, HMRC will examine the following factors before giving tax relief on pension contributions. Make sure that the pension contributions are less than the annual profits gained by the company in a financial year because you can contribute to your pension the amount it has gained as profit, not more than that. For example, if the company profit is £15000, then £15000 is the limit for your yearly pension contribution that can be tax-free.
The Bottom Line
In conclusion, we can say that pension contributions are the right of employees in any company in the UK. Generally, pension contributions are tax-free; however, there are limitations, and a limited tax is charged by the government. For further information in this regard, you can get professional help from one of our experts as well. So get in touch now and get your queries regarding how to claim pension contributions as business expenses in the UK.
Disclaimer: All the information provided in this article on claim pension contributions as business expenses, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.