There is no defined maximum contribution an employer can pay. As long as it can be proved the contribution is exclusively for the purposes of the UK business, tax relief is not restricted on the contribution an employer makes on behalf of the employee.
Any contribution made over the annual allowance will create an annual allowance charge. This charge will be levied on the member. This can cause potential problems for the member as the contribution that has been paid is a legitimate contribution and cannot be refunded, so the member will have to find the money for the charge.
A member earns a salary of £120,000 and makes a personal pension contribution of £25,000 gross.
The employer recognises the essential nature of this employee and contributes into their pension plan an amount of £20,000. Under these circumstances the combined pension contributions are below the annual allowance which can be paid as contributions with no annual allowance charge.
A member earns a salary of £220,000 and makes a personal pension contribution of £45,000 gross.
The employer recognises the essential nature of this employee and contributes into their pension plan an amount of £50,000. As the total pension contributions (£95,000) are in excess of the current annual allowance of £50,000 there is an excess of £45,000.
Although the excess has been created by the employer’s contribution, the excess charge will be levied on the member at an appropriate rate. The appropriate rate is determined by adding the amount subject to the charge to the member’s ‘net income’. The appropriate rate is:
- 20% on that much of the chargeable amount that, when added to net income, does not exceed the basic rate limit.
- 40% on the amount which exceeds the basic rate limit but does not exceed the higher rate limit,
- 50% on any part of the excess which exceeds the higher rate limit.
This charge may be avoided however by utilising pension input periods that result in pension contributions being allocated to different tax years, or by making use of carry forward of unused annual allowance from the three previous tax years.
Where a member of a defined benefits scheme has, for example, been promoted and receives a retrospective increase in benefits, the resulting increase may mean the client is over the annual allowance for the current year but may still be able to offset some or all of any excess by using the carry forward of unused annual allowance rules.