Guide

Choose the right pension scheme

Benefits of having an occupational pension scheme

All employers must provide workers with a qualifying workplace pension. This is called automatic enrolment.

Read more about automatic enrolment into a workplace pension.

Pensions and tax relief

There are other benefits to providing an occupational pension scheme. For pension schemes registered with HM Revenue & Customs (HMRC), extensive tax relief is available:

  • employees' contributions attract income tax relief
  • employer's contributions qualify for corporation tax relief (where the employer is a corporation). If the employer is unincorporated (for example partnerships) they may be subject to income tax relief
  • scheme investments qualify for income tax and capital gains tax relief

This makes pensions a tax-efficient way of increasing employee benefits and remuneration.

The pensions tax regime has been simplified to remove the various limits on what could be paid by or on behalf of an individual into different types of tax privileged pension schemes. Now up to 100 per cent of earned income can be contributed to a registered pension scheme with the benefit of tax relief (although up to £4,000 can be contributed to some pension schemes without reference to an individual's level of earnings). However, there is an overall ceiling for each individual on the annual amount of pension saving that can benefit from tax relief. This limit is called the 'annual allowance' and is £40,000 for 2019-20.

There is also a lifetime ceiling on the amount that can be saved in a registered pension scheme with the benefit of tax relief. Known as the 'lifetime allowance', the limit for 2019-20 is £1.05 million.

Apart from the annual and lifetime allowance, there are no tax rules on how quickly entitlement can be built up in a tax privileged pension scheme, but individual pension schemes may set their own limits.