Advanced Taxation (UK) · Corporation tax: the use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Share Schemes, Pension Contributions and Employer Deductions

Updated 11 October 2026 · Fact-checked

A company can usually deduct employer pension contributions when they are paid, if they are wholly and exclusively for the trade. It can also claim a deduction for shares acquired by employees through options or tax-advantaged schemes. The employee tax treatment differs by scheme (EMI, CSOP, SAYE, SIP, unapproved), and that drives your advice.

Understand Share Schemes, Pension Contributions and Employer Deductions

A company reduces corporation tax by making deductible payments. Employer pension contributions and employee share rewards are two ways to reward staff that cost the company less after tax than plain salary. In ATX you must look at both sides: the company's deduction and the employee's tax.

Employer pension contributions. A contribution to a registered scheme is normally an allowable trading expense if it is wholly and exclusively for the trade. It is deducted in the period it is paid, not when it is accrued. No income tax arises on the employee and no employer or employee NIC arises, unlike salary or a bonus. The limit is on the employee side: employer contributions count towards the annual allowance, which is £60,000, with carry forward of unused allowance and tapering for high earners (threshold income limit £200,000, income limit £260,000, minimum allowance £10,000). In an owner-managed company, check the payment is for the director's services and that total pay is reasonable.

Share schemes. Tax-advantaged schemes give employees favourable tax. The main ones are EMI options, CSOP options, SAYE (save-as-you-earn) options and the SIP (share incentive plan). Anything outside these is unapproved, usually an unapproved option. The tax tables do not give the limits for these schemes. The figures below come from the legislation, so check them against current ACCA guidance before you rely on them.

EMI: for smaller independent trading companies. No income tax or NIC on grant. No income tax or NIC on exercise if the exercise price is at least market value at grant and the option is exercised within 10 years of grant. Tax on a discount applies if the price is lower. The gain is taxed to CGT on sale, and business asset disposal relief at 14% can be available. The BADR rate and lifetime limit are in the tax tables. The rule that the two-year BADR qualifying period runs from the date the EMI option was granted, not from the date of exercise, comes from the legislation, not from the tax tables. Check it against current ACCA guidance.
CSOP: options over shares worth up to £60,000 at grant. No income tax if exercised between three and ten years after grant, with the exercise price at least market value at grant.
SAYE: the employee saves monthly (up to £500) over three or five years. The exercise price may be set at up to a 20% discount.
SIP: free shares (up to £3,600 a year), partnership shares (each tax year, the lower of £1,800 and 10% of salary), and matching shares. Full relief needs a five-year holding period in the plan.

An unapproved option is taxed as employment income on exercise, on the market value less the price paid. The employee has no CGT until later sale. NIC may also arise on the exercise gain, but only if the shares are readily convertible assets. Shares in an unlisted private company usually are not.

Company deduction for shares. A corporation tax deduction under Part 12 of CTA 2009 is available for shares acquired by employees, subject to the conditions on the shares and on the company. Where it applies, it is generally based on the market value of the shares at acquisition less any amount the employee pays. Check the question facts for whether the conditions are met, the amount and the period in which the deduction falls. The employee tax is what differs between EMI, CSOP and unapproved options.

Key rules to remember

Employer pension deduction: Deduction = contribution paid in the accounting period (if wholly and exclusively for the trade); Accrued but unpaid amounts are not deductible until paid. No NIC and no benefit in kind for the employee.
Corporation tax saving from a deduction: Saving = deduction × marginal rate (25% main rate; 26.5% in the marginal relief band); The marginal rate in the band is 25% + 1.5% from the marginal relief fraction of 3/200. It applies to profits between £50,000 and £250,000 (for a 12-month period with no associated companies).
Marginal relief: (£250,000 – augmented profits) × 3/200 × taxable total profits ÷ augmented profits; Deducted from tax at 25%. Limits are reduced for short periods and associated companies.
Company deduction for share acquisition: Deduction = market value of shares at acquisition – amount paid by employee; A Part 12 CTA 2009 deduction, available subject to the share and company conditions. Follow the question facts for the amount and the period.
Unapproved option income: Taxable employment income = market value at exercise – exercise price paid; Taxed as employment income at the employee's rate. NIC may arise only if the shares are readily convertible assets, which unlisted private company shares usually are not. Ignore NIC if the question tells you to.
EMI/CGT gain: Gain = sale proceeds – exercise price paid (– annual exempt amount £3,000 – then 14% with BADR, otherwise 18% or 24%); BADR rate and lifetime limit £1,000,000 are in the tax tables. The rule that, for EMI shares, the two-year BADR period runs from the grant date of the option comes from the legislation, not the tax tables. Check it against current ACCA guidance. Higher rate is 24%.
Pension annual allowance: Annual allowance £60,000; tapering where income exceeds the threshold income limit of £200,000 and the income limit of £260,000; minimum allowance £10,000; Employer contributions count towards the employee's annual allowance.

How to solve Share Schemes, Pension Contributions and Employer Deductions questions

Use this order for any question on pension contributions or share schemes for a company and its employees or directors.

1Read the requirement. Decide whose tax is asked: the company, the employee or both.
2Identify the type of reward: employer pension payment, EMI, CSOP, SAYE, SIP or unapproved option.
3Test the conditions. For a pension: paid in the period, wholly and exclusively for the trade, and within the annual allowance. For a scheme: check company size and independence (EMI), the £60,000 limit (CSOP) and the holding period.
4Work out the company deduction and its date. Deduct it from profits and apply the correct rate (25%, small profits rate of 19% or marginal relief).
5Work out the employee tax: nil, income tax and NIC, or CGT on sale. State when each charge arises.
6Compare alternatives, such as bonus against pension, or EMI against unapproved options, using numbers.
7Add practical points: annual allowance charge, valuation, timing of payment, and commercial or retention issues.

Quickest way: Two-column comparison

When to use it: Use when the question asks you to compare ways of rewarding an employee or director, or to recommend a scheme.

Draw two columns: Company and Employee. List each option as a row.
For each option write the company deduction first, with date and amount.
Write the employee tax next: on grant, on exercise, on sale, and NIC.
Put a figure on the net saving or cost per £1 and state which option is better.
Finish with one condition that could break the relief, such as the EMI size limit or payment after the period end.

Common mistakes in Share Schemes, Pension Contributions and Employer Deductions

Deducting an employer pension contribution in the period it is accrued rather than paid.
Students apply the normal accruals basis for expenses.
Fix: Deduct pension contributions when paid. If the cheque is paid after the year end, move it to the next period.
Ignoring the company deduction for shares and only computing the employee's tax.
The employee side is more familiar from income tax study.
Fix: Always compute market value at acquisition less the amount paid as a deduction in the company's corporation tax computation.
Assuming all tax-advantaged schemes give identical reliefs.
The names and rules for EMI, CSOP, SAYE and SIP are similar.
Fix: List each scheme's limits and conditions separately and match the facts, such as company size, £60,000 or the holding period.
Charging NIC on employer pension contributions or treating them as a benefit in kind.
Students treat the payment like salary.
Fix: Employer contributions to a registered scheme are not taxable earnings and attract no NIC. Note the saving of employer NIC at 15% versus a bonus.
Applying 25% to the deduction without checking where profits fall.
Students forget the marginal relief band.
Fix: Compare profits before and after the deduction against £50,000 and £250,000, and use 26.5% in the band (or work through marginal relief to check).
Forgetting that employer pension payments use up the employee's annual allowance.
The company deduction is seen as the end of the matter.
Fix: Test the total contribution against the £60,000 allowance, unused amounts from earlier years and any tapering, and report any charge to the individual.

Worked examples

Example 1

Bryn Ltd has a 12-month period to 31 March 2026, no associated companies and no dividend income. Profits before any pension contribution are £270,000. On 1 March 2026 it pays £40,000 into a registered pension scheme for its sole director, a payment that is wholly and exclusively for the trade. Compute the corporation tax saving from the payment.

Show the solution

Without the payment: taxable total profits £270,000 exceed the upper limit of £250,000, so tax is £270,000 × 25% = £67,500.
With the payment: it is paid in the period, so it is deducted. Profits are £270,000 – £40,000 = £230,000.
Tax at 25% = £230,000 × 25% = £57,500.
Marginal relief = (£250,000 – £230,000) × 3/200 × £230,000/£230,000 = £20,000 × 0.015 = £300.
Tax payable = £57,500 – £300 = £57,200.
Saving = £67,500 – £57,200 = £10,300.
Check: £20,000 falls in the marginal band at 26.5% = £5,300, and £20,000 above £250,000 at 25% = £5,000, total £10,300.

Answer: The corporation tax saving is £10,300. The director receives the £40,000 with no income tax or NIC, but it uses up annual allowance.

Example 2

Aria Ltd (a small independent trading company with taxable profits well above £250,000) grants an EMI option to an employee over unlisted shares with a market value of £50,000 at grant. The exercise price is £50,000. Four years later the option is exercised when the shares are worth £140,000, and the shares are sold at once for £140,000. The employee is a higher-rate taxpayer with no other gains. The question gives no other income, so assume the option income is taxed at 40%. Assume BADR conditions are met, including the two-year qualifying period measured from the grant of the option. Compare with an unapproved option on the same terms, and state Aria Ltd's corporation tax position, assuming the conditions for the company's deduction are met. Ignore NIC in the comparison.

Show the solution

EMI: no income tax or NIC on grant. There is none on exercise either, because the price equals market value at grant and the option is exercised within 10 years of grant (here after four years).
EMI gain on sale = £140,000 – £50,000 = £90,000.
BADR: the two-year qualifying period runs from the grant date of the option. This rule comes from the legislation, not the tax tables, so check it against ACCA guidance. The option was granted four years before exercise and sale, so the period is met.
Less annual exempt amount £3,000 = £87,000. With BADR at 14% (the rate in the tax tables) = £87,000 × 14% = £12,180. (Without BADR at 24% it would be £20,880.)
Unapproved option: income on exercise = £140,000 – £50,000 = £90,000, taxed as employment income. The question gives no other income, so assume 40% on all of it = £36,000. In practice, part of the income could fall in the 45% additional rate band if the employee had other income. Selling at once for the exercise-date value gives no further gain.
NIC is ignored in this comparison, as the question instructs. In practice it could arise on the unapproved option only if the shares were readily convertible assets, which unlisted shares usually are not.
Company deduction in either case (assuming the Part 12 CTA 2009 conditions are met) = £140,000 – £50,000 = £90,000 in the period of acquisition, saving £90,000 × 25% = £22,500.
Difference for the employee: £36,000 – £12,180 = £23,820 more tax under the unapproved option, on the assumed 40% rate.

Answer: EMI costs the employee £12,180 of CGT (with BADR at 14%, the two-year period running from grant), against £36,000 of income tax for the unapproved option at the assumed 40% rate, ignoring NIC. Aria Ltd gets a £90,000 deduction in both cases, saving £22,500 of corporation tax.

Exam tips

State the company deduction and its timing every time. Many students lose marks for giving only the employee's tax.
Learn the scheme limits (EMI, CSOP £60,000, SAYE £500 a month, SIP £3,600 and £1,800) since the tax tables do not give them, and check them against current ACCA guidance. Use the tables for rates: corporation tax limits, 15% employer NIC, the £60,000 annual allowance, and CGT rates.
Show all workings, work to the nearest £, and show your tax rate in each line, as the exam instructions require.
Use professional skills marks. Give a clear recommendation, note the commercial factors, such as retention and cash flow, and point out the risks if conditions fail.
For owner-managed companies, mention that pension contributions are a tax-efficient way of extracting profit, with the wholly and exclusive test and annual allowance as the limits.

Practice questions from Corporation tax: the use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Share Schemes, Pension Contributions and Employer Deductions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ExecutiveDeduction for Employer Contribution to Pension Scheme (Section 124)

Share Schemes, Pension Contributions and Employer Deductions: frequently asked questions

Are employer pension contributions always deductible for corporation tax?

They are normally deductible if they are wholly and exclusively for the trade and are paid in the accounting period. Check that the total pay for the director or employee is reasonable. Always check the employee's annual allowance too.

What is the difference between EMI and unapproved share options?

An EMI option usually gives no income tax or NIC on grant or exercise if the price is at least market value at grant and the option is exercised within 10 years. The gain is taxed to CGT on sale. An unapproved option is taxed as employment income on exercise, and NIC may arise only if the shares are readily convertible assets. The company can claim a deduction for the shares acquired in both cases.

Do CSOP, SAYE and SIP all give a company deduction?

Yes, in general the company can deduct the cost of providing shares to employees, subject to the conditions. The amount and timing depend on the scheme. State the basis in your answer, for example market value less amount paid.

Do employer pension contributions count towards the annual allowance?

Yes. Employer and employee contributions together are tested against the £60,000 annual allowance, after carry forward of unused allowances and any tapering. A charge falls on the individual, not the company.