TAX PLANNING FOR PAYE EMPLOYEES
Employer pension contributions
There seem to us to be two reasons why you would want your employer to make your pension contributions for you rather than paying you salary, out of which you make your own contributions.
If the pension scheme is a personal pension, the alternative of receiving salary which you then contribute into the scheme is not National Insurance efficient, because you have deducted from your salary an employee’s contribution of 11% or 1% (depending on the earnings level) which you can’t get back by off-setting the pension contribution against your earnings. What’s more, the employer pays a 12.8% employer’s contribution, which also isn’t relieved by any subsequent contribution into the personal pension.
Contrast this with the position where the employer makes a contribution direct into the scheme. There’s no National Insurance, either on the employee or the employer.
For those whose contributions are more substantial, and this may include particularly directors of their own companies, employer contributions are basically constrained, in most cases, by what can be justified as remuneration for the employee. Employee contributions, on the other hand, are constrained by the amount of income they have available to offset. So, this is another reason to consider employer rather than employee contributions.