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What is a third party pension contribution?

A third party pension contribution is a contribution made on behalf of a scheme member by a party other than the member or their employer (or former employer). This could be another individual, a company or other legal entity - for example, a trust.

• The vast majority of third party pension contributions are made by individuals for their family - typically for the contributor's spouse, children or grandchildren
• A company can, in theory, make a third party pension contribution for an individual who isn't an employee. But in practice, this would be very unusual. It's unlikely that the company's articles of association would allow it to make pension contributions for someone who isn't an employee or former employee. Also, it's unlikely that such contributions would be allowed as a valid business expense and, therefore, the contributions wouldn't be deductible for tax purposes
• Third party contributions can be paid from a trust, if the trust provides for pension contributions to be made

Additionally, pension scheme trustees and product providers may impose their own restrictions on who can contribute to a particular scheme.

Where a third party wants to start paying contributions to a new pension scheme on behalf of another individual - for example, a grandparent on behalf of a grandchild - the pension scheme application must normally be made by the proposed member; it's not normally possible for the third party to make the application on their behalf. If the proposed member is a minor, the application has to be completed by their legal guardian - typically one of their parents.

Tax treatment of third party pension contributions

Where a third party pension contribution is made to a registered pension scheme, it's treated as if the scheme member had made the contribution. So it’s the member who gets the tax relief, not the contributor.

The usual tax relief limits apply - relief on contributions up to the greater of 100% of relevant UK earnings or £3,600 - and the contribution counts towards the recipient's annual allowance (and, if applicable, their money purchase annual allowance).

As the tax relief available on third party pension contributions is always based on the tax status of the scheme member:

• a third party contribution to a scheme which operates relief at source (for example, a SIPP or personal pension) will be paid net of basic rate tax and,
• if the scheme member is a higher rate tax payer, they can claim any higher rate tax relief due on the third party contribution.

IHT implications of making third party pension contributions

When an individual makes a third party pension contribution on behalf of another individual, this is an outright gift and, as such, may be considered as a potentially exempt transfer for IHT purposes - unless it's covered by an IHT exemption; typically, one of the following:

• Spousal exemption - gifts between spouses and civil partners are generally free of IHT, provided that the recipient is UK domiciled or deemed domicile. If the recipient is non-UK domiciled, the exemption is limited
• Annual exemption - gifts up to £3,000 each tax year. The annual exemption can be carried forward for one tax year only, meaning that an individual could potentially make an exempt third party contribution of up to £6,000
• Normal expenditure out of income - for this exemption to apply, gifts must form part of normal expenditure and be made out of income. There should be a regular pattern of gifting and the donor must be left with enough income to maintain their usual standard of living

Further information on IHT exemptions can be found in our guide ‘IHT exemptions & reliefs’.