No. Section 308 of the Income Tax (Earnings and Pensions) Act 2003 says no income tax arises when an employer contributes to a registered pension scheme in respect of an employee, and those contributions are also left out of earnings for Class 1 National Insurance. They still count towards the employee’s annual allowance, so a large employer contribution can trigger an annual allowance charge for the employee.
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Why are employer contributions not taxed as pay?
Most things an employer pays for on an employee’s behalf are taxable benefits. Pensions are the main exception. Section 308 ITEPA 2003 provides that no liability to income tax arises on earnings where an employer makes contributions under a registered pension scheme in respect of the employee. Section 307 adds a separate exemption under the benefits code for the cost of providing a pension or similar benefit payable on the employee’s retirement or death.
HMRC’s Employment Income Manual at EIM01570 explains that, in practice, the contribution must fund benefits for the employee or benefits payable on the employee’s death, such as death in service cover. It makes no difference whether the scheme is the employer’s occupational scheme, an auto enrolment scheme or a personal pension the employee set up and the employer pays into.
Do employees pay National Insurance on them?
No. HMRC’s National Insurance Manual at NIM02716 says that where section 308 applies, the payment is disregarded when working out earnings for Class 1 contributions. The legal basis is paragraph 2(a) of Part 6 of Schedule 3 to the Social Security (Contributions) Regulations 2001. Neither employee nor employer Class 1 contributions are due on the contribution itself.
Salary sacrifice uses this. The employee gives up pay and the employer pays the same amount into the pension, so tax and National Insurance on that slice of pay disappear. From April 2029 only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance, although all ordinary employer contributions stay free of it. See the £2,000 cap on NI free pension salary sacrifice.
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Does the employer have to report them on a P11D?
No. HMRC’s guidance on expenses and benefits says that for contributions to a registered scheme you do not have to report or pay anything to HMRC. Pension contributions are also one of the few items that need no valuation or reporting even when provided through salary sacrifice. The contribution simply does not appear in taxable pay on the payslip or P60. For the benefits that do need reporting, see benefits in kind and the P11D.
When can an employer pension contribution be taxable?
The exemption has limits, and these are where problems come from:
- Family members’ pensions. Since 2013 to 2014, a contribution into the own pension of a member of the employee’s family or household who is not an employee of the employer is not in respect of the employee. EIM01570 says it is taxable on the employee as earnings under the benefits code.
- Unregistered schemes. Contributions to an employer financed retirement benefits scheme fall outside section 308. The employer has reporting duties as the responsible person and must deduct PAYE where it applies.
- Paying the employee’s own contributions. If an employer pays contributions the employee was supposed to make and does not recover them, HMRC’s manual treats this as a matter to be looked into rather than an ordinary employer contribution.
- Making good after opting out. If an employee opts out of a salary sacrifice pension and the employer pays them the shortfall in cash, that cash is taxable pay with National Insurance.
How do employer contributions count towards the annual allowance?
The annual allowance limits tax privileged pension saving from all sources, not just the employee’s own payments. HMRC’s guidance says it covers the total paid into a defined contribution scheme in the tax year by you or anyone else, including your employer, plus any increase in a defined benefit scheme. For 2026 to 2027 the standard annual allowance is £60,000.
In a defined benefit scheme the employer’s cash contribution is not what is tested. The pension input amount is the increase in the value of the member’s promised benefits, so funding payments by the employer do not count directly. See defined benefit pension input amounts.
Employer money also feeds the tapered annual allowance. The allowance is reduced if threshold income is over £200,000 and adjusted income is over £260,000. Threshold income does not add back ordinary employer contributions, although pay given up for pension under salary sacrifice arrangements made after 8 July 2015 is added back. Adjusted income adds back the pension savings your employer made for you, so a large employer contribution can bring the taper into play once threshold income is over the limit.
Employer contributions are not limited by the employee’s earnings for tax relief in the way personal contributions are. Members get relief on their own contributions up to the greater of £3,600 and their relevant UK earnings. An employer has no set limit, but its deduction is subject to the normal business expense rules.
What happens if the allowance is exceeded?
The excess is taxed on the employee as an annual allowance charge at their marginal rate, even though the employee never received the money. Unused allowance from the previous three tax years can be carried forward to cover it. Any charge goes in the pension savings tax charges section of a Self Assessment return, and in some cases the scheme can pay it and reduce the member’s benefits. See the pension annual allowance for how the charge is worked out.
A worked illustration
Illustration only. Sam earns £55,000. Sam pays 5% of salary into the workplace defined contribution scheme and the employer pays 8%.
| Item | Amount | Tax treatment |
|---|---|---|
| Employer contribution (8%) | £4,400 | Not taxable pay, no National Insurance, not on P11D |
| Employee contribution (5%) | £2,750 | Tax relief given on Sam’s own payment |
| Total counted against annual allowance | £7,150 | Well within £60,000 |
If Sam’s employer instead paid a one off £70,000 contribution in the same year, the total would be £72,150. Sam would need £12,150 of unused allowance from the previous three years to avoid a charge.
What mistakes come up most often?
- Assuming that because employer contributions are tax free they cannot cause a tax bill. They count towards the annual allowance in full.
- Leaving employer contributions out of adjusted income when checking the taper.
- Directors paying into a spouse’s pension through the company when the spouse is not employed by it. That is taxable on the director. See employer pension contributions for company directors.
- Reporting registered pension contributions on a P11D when nothing needs to be reported.
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Related Accountapedia entries
- Employer pension contributions for company directors
- Personal or employer pension contributions
- Employer paid personal tax advice: is it taxable
- Spreading large employer pension contributions
- Is the State Pension taxable
Related cover: Employers liability insurance: the legal requirements and Employers liability vs public liability.
Sources
- legislation.gov.uk: Act 2003 c. 1, section 308
- GOV.UK: Manual page EIM01570
- GOV.UK: Manual page EIM21800
- GOV.UK: Manual page NIM02716
- GOV.UK: Changes to salary sacrifice for pensions from april 2029
- GOV.UK: Expenses and benefits retirement benefit schemes
- GOV.UK: Salary sacrifice and the effects on paye
- GOV.UK: Annual allowance
- GOV.UK: Income tax rates
- GOV.UK: Pension schemes work out your tapered annual allowance
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.