Employers can contribute to employee’s pensions as part of a remuneration package.
A pension scheme is a managed fund into which tax-relieved contributions are paid by individuals and employers. The contributions are invested by the fund managers so as to grow and create a pot of money that can be accessed by the individual once they reach the minimum pension age (currently age 55) in order to fund their retirement.
An employer can make contributions to an employee’s pension fund as part of a remuneration package. Employer contributions to a pension fund are deductible expenses for the business, along with other employee remuneration, so no tax is payable by the employer on those contributions.
Employees can also make their own contributions; these can be made through the payroll, so that the employer deducts the contributions from the employee’s pay and pays them directly to the pension provider. Because the contributions are deducted before tax, employees benefit from immediate tax relief on the contributions, however National Insurance Contributions are still due on the payrolled pension contributions.
Individuals can have a total of £40,000 of contributions (employer and individual) per tax year, after which tax relief is withdrawn, although any unused allowance from the previous 3 tax years can be used up. Once an individual begins to access their pension, this annual allowance is reduced to £10,000 to prevent abuse of the new flexible access rules for pensions.