Pension contributions for your partner

September 29th 2023

A business associate says he gets a tax break by getting his company to pay a pension contribution for his spouse who’s currently not working. Is this something you should consider?  Head of Payroll and Partner Joanne Gibson takes a closer look below.

You are possibly aware that individuals aged under 75 can, in theory, pay unlimited amounts into a registered pension scheme and obtain tax relief for this.

However, in practice, pension companies will not usually accept contributions in excess of the amount which can qualify for tax relief. For each tax year that is the greater of £3,600, your UK taxable employment income or profits from business, but capped at £60,000.

Anyone can pay into a pension for someone else and receive tax relief for doing so. For example, you could pay a contribution for your spouse or unmarried partner or your company could do the same.

Bill who owns and manages his own company, is married to Jill who currently has no taxable income. Bill can help Jill to build a pension fund while she’s not working by paying contributions of up to £3,600 per year. After basic rate tax relief (20%) the cost to Bill is just £2,880. However, he has to meet this cost out of his taxed income from his company. Could the arrangement be made more tax efficient if he cut himself out as the middleman and got his company to pay direct?

Getting his company to pay pension contributions for himself is tax and NI efficient because the company’s contributions are exempt. If this exemption extends to contributions for Jill’s pension, it makes sense for it to pay her contributions rather than him.

The relevant legislation says: “No liability to income tax arises in respect of earnings where an employer makes contributions under approved personal pension arrangements made by an employee.” As Bill sees it, he is making the “arrangements” and therefore if his company pays the contributions, the exemption applies.

However, HMRC’s view is that the pension plan must be for the benefit of the employee for the exemption to apply. While the wording of the legislation isn’t clear, our view is that HMRC is probably right. This means that if Bill’s company paid into a pension plan for Jill, it would count as his taxable income. So for a £3,600 contribution, assuming Bill is a higher rate taxpayer, the total tax and NI cost for him and his company would be between £850 and £1,160 depending on the rate of corporation tax his company pays.

There is a cheaper alternative. It seems Jill’s pension contributions could cost more or slightly less depending on the company’s corporation tax rate, either way there’s not a great deal in it. The good news is that there’s a better alternative.

If Bill transfers just a small fraction of his company’s ordinary shares to Jill and the company pays the £3,600 annual contributions, it counts as a distribution, which is taxed like a dividend. Jill’s personal tax-free allowance will make the distribution entirely tax free.

While your company can pay pension contributions for your spouse or partner it’s not usually tax efficient as it can count as your earnings. To make it tax efficient, transfer some of your shares to your spouse so that when the company contributes to their pension it counts as their dividend income.

For further tax related queries please contact JRW’s Tax department directly