Spreading large employer pension contributions

Employer contributions to a registered pension scheme are normally deductible in the period in which they are paid, but relief must be spread forward when contributions to a scheme in one period exceed 210% of those paid in the previous period and the excess over 110% of the previous period’s contributions is £500,000 or more. Depending on the size of that excess, relief is spread over two, three or four periods. Special rules apply when the employer stops trading.

What is the normal rule for relief on employer contributions?

Section 196 of the Finance Act 2004 gives relief for employer contributions to a registered pension scheme on a paid basis. For a trade or profession, contributions are deducted in the period of account in which they are paid and in no other period (section 196(2)). For a company with an investment business, they are deducted as management expenses in the accounting period in which they are paid (section 196(3)).

HMRC’s Business Income Manual at BIM46010 explains the practical effect: the accounting charge is not followed for tax, so the computation adds back the pension cost in the profit and loss account and deducts the contributions actually paid. This is particularly relevant for defined benefit schemes, where the accounting expense can differ substantially from the cash paid. Contributions still have to meet the wholly and exclusively rule (PTM043200).

The spreading rules in sections 197 and 198 then cut across the paid basis for unusually large increases in contributions. For owner managed companies, the general rules on relief are covered in our guide to pension contributions for business owners.

When must relief be spread?

Section 197(1) applies where an employer pays contributions to a registered pension scheme in two consecutive chargeable periods and the contributions paid in the current period, other than for an excepted purpose, exceed 210% of those paid in the previous period. HMRC’s Pensions Tax Manual at PTM043400 sets out four steps:

Work out the contributions actually paid in the current and previous chargeable periods.
If the periods are of different lengths, adjust the previous period’s contributions.
Check whether the current period’s contributions exceed 210% of the previous period’s, and if so calculate the excess over 110% of the previous period’s contributions. That excess is the relevant excess contribution.
If the relevant excess is £500,000 or more, relief on it is spread. If it is less, there is no spreading (section 197(3)(a)).

A chargeable period means a period of account where the contribution relates to a trade or profession, and an accounting period where it relates to an investment business.

What counts as a contribution for the test?

Only contributions actually paid count. HMRC stresses that relief brought forward from an earlier spread is not a contribution paid in the period it is relieved, and that accounting provisions are ignored because they are not payments.

Two kinds of current period contribution are excluded from the test as excepted purposes: contributions to fund cost of living increases for pensions already in payment, and contributions to fund future service benefits for members who join the scheme in the current period. These amounts are relieved in full in the period paid. However, when calculating the previous period’s figure, contributions of those kinds paid in the previous period are included.

The test is applied separately to each registered pension scheme. An employer that contributes to two schemes compares the contributions to each scheme, not the combined total. If nothing was paid to the scheme in the previous period, for example because the scheme has just been set up, the rules do not apply because there are not contributions in two consecutive periods.

How is relief spread?

The spreading period depends on the size of the relevant excess (section 197(5)):

Relevant excess contributions	Treatment
£500,000 or more but less than £1,000,000	One half treated as paid in the next chargeable period
£1,000,000 or more but less than £2,000,000	One third treated as paid in each of the next two chargeable periods
£2,000,000 or more	One quarter treated as paid in each of the next three chargeable periods

The remainder stays in the current period, together with the part of the contribution that is not excess. HMRC notes that once a spread has been fixed it does not change unless the employer ceases business.

What if the accounting periods are different lengths?

Under section 197(8) and (9), if the current and previous chargeable periods are not the same length, the previous period’s contributions are multiplied by the number of days in the current period divided by the number of days in the previous period. HMRC says this adjustment is not needed simply because one period includes a leap day.

The adjustment is most often needed after a change of accounting date. A long previous period inflates the comparison figure if left unadjusted, and a short one deflates it. Our guide to changing a company’s year end covers the wider tax effects of moving a year end, and corporation tax periods are explained in accounting periods and periods of account.

What happens if the employer stops trading?

Section 198 protects relief that would otherwise be lost. If the employer ceases business in the period the large contribution was paid, or in a later period into which relief has been spread, and the spreading would prevent full relief before cessation, the employer can choose either:

to deduct the whole unrelieved balance in the chargeable period in which it ceases business; or
to treat the unrelieved balance as paid in equal daily amounts from the first day of the chargeable period in which the contribution was paid to the day the business ceases.

Separately, section 199 treats a payment an employer makes to meet a debt under section 75 of the Pensions Act 1995 as a contribution, and where the employer has ceased trading it is treated as paid on the last day of trading (BIM46010).

Can spreading be avoided by paying through a third party?

No. Section 199A, which applies to payments made on or after 10 October 2007 (apart from those under contracts entered into before 9 October 2007), treats certain payments as contributions for spreading purposes. It catches a payment intended to help a third party pay pension contributions, where the employer contributed to the scheme in the previous period, relief would have been spread had the employer paid directly, and one of the purposes of using the third party was to avoid section 197. HMRC says this includes cases where relief reaches the employer indirectly, such as through an intra group recharge.

A worked illustration

Illustration only. A company with a 31 December year end paid £1,000,000 into its defined benefit scheme in the year to 31 December 2025. In the year to 31 December 2026 it pays £3,500,000, of which £100,000 funds cost of living increases for pensioners. Both periods are 12 months.

Contributions for the test: £3,500,000 less £100,000 excepted = £3,400,000.
210% of £1,000,000 is £2,100,000, which is exceeded, so the rules may apply.
Relevant excess: £3,400,000 less 110% of £1,000,000 (£1,100,000) = £2,300,000.
That is £2,000,000 or more, so one quarter (£575,000) is treated as paid in each of the next three periods.
Relief in 2026: £3,500,000 less £1,725,000 = £1,775,000. Relief of £575,000 follows in each of 2027, 2028 and 2029, in addition to whatever the company actually pays in those years.

Common mistakes include testing the combined contributions to several schemes, counting relief brought forward as a contribution paid, forgetting the excepted purposes, failing to adjust for a change of accounting date, and deducting the accounts charge instead of the cash paid. Each one changes the deduction in the corporation tax computation.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.