As a business owner, it is your responsibility to ensure that your employees are provided with a pension plan for their retirement. This can be achieved through employer pension contributions ...
Employer pension contributions are payments made by the company on behalf of its employees towards their pension scheme!
It is important to understand the two main types of pension schemes in the UK. These are called 'defined benefit' and 'defined contribution'. In a defined benefit scheme, the employer guarantees a specific amount to be paid to the employee upon retirement.
In a defined contribution scheme, the employer contributes a set amount to the employee's pension fund, but the final amount received by the employee is dependent on the performance of the investments.
Now, let's explore the key aspects of employer pension contributions:
Eligibility and Contribution Limits
Under UK law, all employers are required to offer a workplace pension scheme to eligible employees. Eligible employees include those who are at least 22 years old, earning over £10,000 per year, and working in the UK. However, employees have the right to opt out of the scheme if they choose to do so.
When it comes to contribution limits, there are two main factors to consider: the Annual Allowance and the Lifetime Allowance. The Annual Allowance is the maximum amount that can be contributed to a pension scheme in a tax year, currently set at £60,000 for the 2023/24 tax year. There will be no Lifetime Allowance in 2024/25 as it is being abolished and new rules are coming in around tax-free lump sum payments.
Corporation Tax Relief
One of the main benefits of employer pension contributions is the tax relief available to the company. These contributions are considered a business expense and are therefore eligible for Corporation Tax relief. This means that the company can deduct the contributions from its taxable profits, resulting in a lower tax bill.
However, it is important to note that the contributions must be wholly and exclusively incurred for the purposes of the trade to qualify for tax relief. This means that they must be made for the benefit of the business, rather than for personal gain.
Employee Benefits
Employer pension contributions not only benefit the company in terms of tax relief, but they also provide valuable benefits to employees. These contributions can help employees save for their retirement and provide them with a stable source of income in their later years. In addition, employer contributions can also be seen as a form of employee compensation, helping to attract and retain top talent in the company.
Compliance and Reporting
As a business owner, it is crucial to ensure that your company is compliant with all pension regulations. This includes enrolling eligible employees in a pension scheme, making the required contributions, and providing regular updates and statements to employees about their pension.
Additionally, companies are required to report their pension contributions and deductions to HMRC through Real Time Information (RTI). This ensures that the correct amount of tax is being paid on employee contributions and that the company is meeting its obligations.
Employer pension contributions are an important aspect of running a business. It is crucial for business owners to understand the eligibility and contribution limits, tax relief benefits, and compliance requirements surrounding these contributions.
By prioritising employee retirement planning and staying compliant with regulations, businesses can create a positive work culture and attract top talent.
Until next time ...
ROGER EDDOWES Business Godparent
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about employer pension contributions, it may be a great idea to call me on 01908 774320 and let's see how I can help you.
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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