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View our Current Terms of Business

Employer Contributions

Employer Contributions Summary

 
  • Employers can contribute to a SIPP on your behalf within limits set by HMRC. Evidence is required that the employment link exists eg wage slip.
  • Complications can arise where the employer wishes to make substantial contributions for directors or key employees whose relevant earnings do not support such contributions.
  • Contributions made by employers, to be an allowable expense, must be incurred wholly and exclusively for the purpose of the employer’s trade.
  • In order to put up a robust defence to any potential HMRC challenge, it is of great value to be able to demonstrate that a pension contribution made by the employer is pursuant to a contractual obligation.
  • Service Agreements are straight-forward to implement, and their existence is a potentially invaluable aid to ensuring that the contribution for Directors or owners of small businesses is treated as an allowable expense.
 

Implementing the Service Contract

There are two elements to this:
  1. Service Contract – Pension Element 1 (BIM46020 – Appendix) Reward Structure Contributions made as part of a salary sacrifice arrangement can, in certain circumstances, be treated as allowable. Thus, whilst contracts can be open to challenge if they are not seen as an accurate reflection of underlying arrangements, the Service Contract should specifically state that such an arrangement would be acceptable as part of the terms of employment. In order to structure the risk and reward aspect of the director’s remuneration it is also essential that a significant proportion of the reward is directly linked to the performance of the director and the profitability of the business. Thus bonuses (especially if linked to objective factors) can play an important part in this arrangement.
  2. Service Contract – Pension Element 2 (BIM46025 – Appendix) Funding The second element is the funding of a pension arrangement to the maximum allowable without triggering any unauthorised payment tax charges. Employers have always regarded affordability as one of the important factors in the funding of pension schemes. This has in almost all cases been on an informal and ad hoc basis. This served good purpose as the actuaries report determined the allowable status of the contribution. Now, however, this needs to be formalised. Thus the Service Agreement should also specify that the employer undertakes to fund the director’s benefits to the Lifetime Allowance as long as it is affordable.

Other Considerations

The overall consideration has to be the value of the individual to the business. This is measured by the total reward for the individual including all benefits (pension contributions are an important part of this). Thus the reward of the individual must be broadly comparative to an equivalent officer in similar businesses generating broadly similar value.