Understanding whether Company Pension Contributions are Tax Deductible for Family Members can be an excellent way for company owners to save for retirement while reducing corporation tax—but only if done correctly.
A customer recently asked us whether a £60,000 and £40,000 pension contribution for himself and his wife, the directors, would be fully deductible. The contribution was meant to reflect the work done for the company.
The principal director was the main driver of the company’s income. Still, his wife had also performed significant duties and tasks during the year as a director and, rather than receiving a salary, had requested a contribution from the company to her pension.
HMRC’s Business Income Manual (BIM46035) states that employer pension contributions are tax-deductible as long as they are “wholly and exclusively” for business purposes. That means:
✔ It must be a legitimate part of the director’s pay package
✔ It should be reasonable for the director’s role and the company’s profits
✔ It can’t just be a way to avoid tax
If HMRC thinks the contribution is excessive, they might challenge it. (See HMRC guidance)
Document your decision
A way to protect your tax relief is to document the decision with a board meeting. This shows that the contribution is a legitimate business expense, not just for tax savings.
What to Include in the Meeting Minutes:
- The director’s total pay package (salary, bonuses, pension)
- Why does the contribution make commercial sense for the company
- A formal approval of the amount
Here’s a quick template you can use:
[Your Company Name] – Board Meeting Minutes
Date: [Insert Date]
Time: [Insert Time]
Location: [Company Address]
1. Attendees:
[List names of directors present]
2. Purpose of the Meeting
The board convened to review and approve an employer pension contribution of £40,000 for [Director’s Name] £60,000 for [Director’s Name] for the financial year [Insert Year].
3. Discussion Points
- Director’s Remuneration Review: The board assessed the director’s total compensation package, including salary, benefits, and bonuses, to ensure the pension contribution aligns with their overall remuneration.
- Justification for Pension Contribution:
- The total remuneration amount is reasonable compared to industry benchmarks for similar roles.
- The company has sufficient profits to support the contributions.
- HMRC Compliance Considerations:
- The pension contributions are made “wholly and exclusively” for business purposes in line with HMRC guidance (BIM46035).
- It is not excessive concerning the director’s role within the company.
- The total remuneration is comparable to that of a third-party employee at this level.
- Company Financial Position:
- The business has reviewed its cash flow and forecasts to confirm affordability.
- The contribution will not negatively impact operations or liquidity.
4. Decision & Approval
The board unanimously agreed that the pension contribution of £60,000 and £40,000 should be made on behalf of [Director’s Names ], effective from [Effective Date]. This decision was made in line with the company’s remuneration policy and HMRC’s guidelines for allowable deductions.
5. Action Points:
- The finance team will process the pension contribution before [Payment Date].
- The company will maintain these minutes as part of its financial records in case of a future HMRC review.
- The minutes will be shared with the company accountants as evidence, as wholly and exclusively made pension contributions will be fully allowed when preparing the associated tax return.
6. Meeting Adjournment
There being no further business, the meeting was adjourned at [Time].
Signed:
[Chairperson Name] – Chair
Date: [Insert Date]
Final Thoughts
Keep a paper trail if you’re making significant lump sum pension contributions. HMRC may check if the amount looks high compared to the salary. A quick board meeting can save a lot of hassle later.
