Accounting for defined contribution pensions

Q: What must the pensions note disclose?

Every FRS 102 company: paragraph 28.40 requires the amount recognised in profit or loss as an expense for defined contribution plans. Paragraph 28.40A adds the disclosures for a multi employer defined benefit plan accounted for as defined contribution. Companies outside the small companies regime: section 411(5) of the Companies Act 2006 requires total staff costs split between wages and salaries, social security costs and other pension costs. Section 411(6) defines pension costs to include costs for any scheme set up to provide pensions for current or former employees, and defines social security costs as contributions to state schemes, so the State Pension is not part of the pension line. Directors: for companies reporting under SI 2008/410, Schedule 5 paragraph 1 requires the aggregate value of company contributions to money purchase schemes for directors' qualifying services, and the number of directors accruing benefits under money purchase schemes and under defined benefit schemes. Small companies: paragraph 1AC.29, reflecting Schedule 1 paragraph 57(3) of the small company regulations, requires the total of any commitments concerning pensions to be disclosed separately, and paragraph 1AC.33 requires the average number of employees under section 411. It is common, though not a specific requirement, to state the amount of contributions outstanding at the year end, which helps a reader see the accrual.

Under FRS 102 an employer recognises its contributions to a defined contribution pension scheme as an expense in the period the employees work, not when the money reaches the provider. Contributions due for that service but unpaid at the year end are a liability, and overpayments are an asset only if they will reduce future payments or be refunded. The notes must at least show the pension expense, with more for larger companies and directors.

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When does a scheme count as defined contribution?

Paragraph 28.10(a) of FRS 102 describes a defined contribution plan as one where the employer pays fixed contributions into a separate fund and has no legal or constructive obligation to pay more if the fund cannot pay all the benefits earned. The employee’s pension depends on what is paid in and the investment returns. Group personal pensions, master trusts and most automatic enrolment schemes work this way.

Two edge cases need care. Paragraph 28.12 says an insured arrangement is defined contribution unless the employer keeps an obligation to pay benefits directly or to top up if the insurer does not pay. Paragraph 28.11 says a multi employer scheme that is really defined benefit is accounted for as defined contribution only where there is not enough information for defined benefit accounting, and then paragraph 28.40A requires extra disclosure about the scheme and any deficit.

When is the employer contribution charged to profit or loss?

Paragraph 28.13 requires the contribution payable for a period to be recognised as an expense, unless another section requires it to be included in the cost of an asset such as inventories or property, plant and equipment, and as a liability after deducting anything already paid. The trigger is the service the employees gave in the period. A contribution relating to March salaries belongs in March, even if it is collected from the bank in April.

Employee contributions deducted from pay are different. They are part of the employee’s wages and are already in the salary cost. The employer holds them for a short time and owes them to the scheme, so they sit in creditors until paid over, but they are not an extra pension expense for the employer.

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How are unpaid contributions accrued at the year end?

The usual accrual is the employer and employee contributions for the final payroll period, which are deducted or due at the year end and paid to the provider in the following month. Paragraph 28.13(a) makes the unpaid employer amount a liability. Most accounts show it within accruals or other creditors.

A larger accrual can arise when an employer has missed automatic enrolment duties. The Pensions Regulator explains that an employer that is late putting staff into a scheme may have to backdate membership and contributions to the date each worker first met the age and earnings criteria, and the employer must pay any unpaid employer contributions. Since 6 April 2019 the statutory minimum has been at least 3% of qualifying earnings from the employer within a total of 8%. If the shortfall relates to service in earlier years, the cost belongs to those years. Where it is a material prior period error under paragraph 10.19, paragraph 10.21 requires it to be corrected by restating comparatives rather than charging it all in the current year.

What if contributions are paid early or settled over a long period?

If payments exceed the contributions due for service before the reporting date, paragraph 28.13(a) allows the excess to be shown as an asset only to the extent it will lead to a reduction in future payments or a cash refund. A director’s one off contribution paid in advance of future service is therefore a prepayment only if the scheme terms really allow it to be set against later contributions.

Paragraph 28.13A covers the less common case of contributions not expected to be settled wholly within 12 months after the end of the period in which the service is given. The liability is then measured at present value, using the high quality corporate bond discount rate in paragraph 28.17, and the unwinding of the discount is a finance cost.

How does it look with numbers?

Illustration only. A company with a 31 March 2026 year end pays employer contributions of £4,000 a month, collected by the provider in the month after each payroll. The March 2025 contributions of £3,800 were paid in April 2025.

Item	Amount
Expense for April 2025 to March 2026 (12 x £4,000)	£48,000
Cash paid in the year (£3,800 for March 2025 plus 11 x £4,000)	£47,800
Accrual at 31 March 2026 for the March 2026 contributions	£4,000

The journal each month is a debit to pension costs within staff costs and a credit to the pension creditor, which is cleared when the provider collects. Opening accrual £3,800, plus expense £48,000, less payments £47,800, gives the closing accrual of £4,000.

Why does the tax deduction follow payment instead?

Section 196 of the Finance Act 2004 says employer contributions to a registered pension scheme, if deductible, are deducted in the period of account in which they are paid. In the illustration the accounts charge £48,000 but the deduction for the year is £47,800, so £200 is added back. Because the difference reverses when the accrual is paid, it is a timing difference, and paragraph 29.6 requires deferred tax on timing differences at the reporting date. Section 196 is subject to the spreading rules in sections 197 and 198 for large increases in contributions. Whether a director’s contribution is wholly and exclusively for the trade is a separate tax question covered in our guide on company pension contributions.

What must the pensions note disclose?

Every FRS 102 company: paragraph 28.40 requires the amount recognised in profit or loss as an expense for defined contribution plans. Paragraph 28.40A adds the disclosures for a multi employer defined benefit plan accounted for as defined contribution.
Companies outside the small companies regime: section 411(5) of the Companies Act 2006 requires total staff costs split between wages and salaries, social security costs and other pension costs. Section 411(6) defines pension costs to include costs for any scheme set up to provide pensions for current or former employees, and defines social security costs as contributions to state schemes, so the State Pension is not part of the pension line.
Directors: for companies reporting under SI 2008/410, Schedule 5 paragraph 1 requires the aggregate value of company contributions to money purchase schemes for directors’ qualifying services, and the number of directors accruing benefits under money purchase schemes and under defined benefit schemes.
Small companies: paragraph 1AC.29, reflecting Schedule 1 paragraph 57(3) of the small company regulations, requires the total of any commitments concerning pensions to be disclosed separately, and paragraph 1AC.33 requires the average number of employees under section 411.

It is common, though not a specific requirement, to state the amount of contributions outstanding at the year end, which helps a reader see the accrual.

What about micro entities?

FRS 105 uses the same definition of a defined contribution plan in paragraph 23.9, and paragraph 23.10 has the same present value rule for contributions not settled within 12 months. The expense and accrual work in the same way; the difference is in the limited notes a micro entity provides.

What mistakes come up most often?

Charging contributions when paid, so the year end accrual is missed and one year shows 11 months of cost.
Adding employee deductions to the pension expense, which double counts them with salaries.
Recording an advance contribution as a prepayment when the scheme does not allow it to reduce future payments.
Charging backdated automatic enrolment contributions for earlier years in the current year without considering paragraph 10.21.
Claiming the accrued contribution as a tax deduction before it is paid, contrary to section 196.

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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.