How company-paid pension contributions work
When your UK limited company pays into a pension scheme on your behalf, three things happen:
- The contribution is deductible against corporation tax. A £10,000 company pension contribution reduces taxable profit by £10,000, saving £1,900-£2,650 in corporation tax depending on your CT band.
- You pay no income tax or NI on the contribution. Unlike salary, the £10,000 doesn't go through PAYE.
- The money sits in your pension, growing tax-free until withdrawal (25% tax-free, the rest at your then-marginal income tax rate from age 55, rising to 57 from 2028).
The net effect: £10,000 of pension contribution costs the company £7,350-£8,100 after tax relief, gives you £10,000 of pension wealth, and avoided NI entirely. Compare to taking the same £10,000 as a dividend (post-CT, post-dividend-tax): for a higher-rate director, that £10,000 of pension wealth would have cost £15,000-£17,000 of gross profit. Pension is roughly 2x as efficient.
Annual allowance + carry-forward
The annual allowance for pension contributions in 2025/26 is £60,000 per individual (or 100% of UK earnings if lower — but for most owner-managed directors, the £60,000 cap applies because their relevant earnings are salary, not dividends).
Tax-relievable contributions are the lower of:
- £60,000 (the annual allowance), or
- Your relevant UK earnings — broadly salary, not dividends.
BUT — company-paid contributions are made by the company, not by you, and they're not capped by your relevant earnings. They're capped only by the annual allowance and by the "wholly and exclusively" rule (the contribution must be reasonable remuneration for your work).
Carry-forward
If you haven't used your full annual allowance in the previous three tax years, you can carry the unused amount forward. With three full years of unused allowance (e.g. you only contributed £10,000/year and £50,000 was unused each year), you could make a single contribution of up to £150,000 + £60,000 = £210,000 in one year, fully tax-relieved.
This is the most powerful single tax planning move available to higher-earning directors who haven't been making pension contributions. Worth modelling exactly with your accountant before year-end.
Pension vs salary vs dividends — head-to-head
For a higher-rate-taxpayer director, comparing £10,000 of value extracted as each form (2025/26 rates, simplified):
| Method | Company cost | Tax paid | Net in director's hand or pension |
|---|---|---|---|
| Salary (gross £10,000) | £11,500 (incl. employer NI) | £10,000 × 40% IT + £200 empNI on director side + £1,500 emprNI on company side = £5,700 total | £5,800 in cash |
| Dividend (gross £10,000) | £12,346 (pre-CT profit needed) | £2,346 CT + £3,375 div tax = £5,721 total | £6,625 in cash |
| Company pension contribution (£10,000) | £10,000 | -£1,900 to -£2,650 CT saving | £10,000 in pension |
The pension route puts ~70% more value into the director's wealth than dividends, and ~73% more than salary. The catch: the money is locked up until age 55-57. For directors not approaching retirement, that's a real liquidity cost. But if you intend to keep some portion of company profit as long-term savings anyway, the pension route is dramatically more efficient than extraction.
Worked example: £100k revenue director
Director on £100,000 of revenue, taking £12,570 salary, no other income, considering pension contributions:
Without pension contribution
Take-home: £67,221. Effective tax rate: 32.8%.
With £30,000 company pension contribution
The company contributes £30,000 to the director's pension. This reduces profit before CT by £30,000.
Reworked numbers (programmatic):
- Revenue: £100,000
- Less salary: £12,570
- Less pension: £30,000
- Profit before CT: £57,430
- Corporation tax (marginal relief band): £11,469
- Dividend pool: £45,961
- Dividend tax (£500 allowance, then basic/higher rate): £5,918
- Cash take-home: salary + dividends - dividend tax = £52,613
- Plus £30,000 pension wealth
- Total economic value: £82,613
Compare: without pension, take-home is £67,221. With £30k pension, the total economic value (cash + pension) is higher by several thousand pounds — that's the value of the corporation tax saving plus avoided dividend tax on what would have been extracted.
Take Home models this exactly with your actual numbers and shows the optimum split for each tax year.
Limitations and gotchas
- Wholly and exclusively rule. HMRC requires company pension contributions to be a reasonable remuneration for the director's role. £100,000 contributions to a director who barely works for the company would be challenged. As a rule of thumb, total remuneration (salary + bonus + pension + dividends from the role) shouldn't be wildly out of line with what you'd pay a non-related employee to do the same job.
- Locked until 55-57. You can't access pension money before age 55 (rising to 57 from 2028) except in narrow circumstances (terminal illness, etc.). For early-career directors, the liquidity cost matters.
- Annual allowance taper for very high earners. If your "threshold income" exceeds £200,000 AND your "adjusted income" exceeds £260,000, the annual allowance tapers down by £1 for every £2 above £260,000, to a minimum of £10,000. Most owner-managed directors don't hit this, but high-earning multi-stream professionals can.
- Lifetime allowance abolished but watch the legacy LSDBA. The lifetime allowance was abolished from 6 April 2024, but the Lump Sum and Death Benefit Allowance (£1.073M) limits the tax-free lump sum + death benefits. For very large pension pots, this matters at withdrawal.
- SIPP vs employer scheme. Most owner-managed directors use a Self-Invested Personal Pension (SIPP) — Penfold, PensionBee, AJ Bell, Hargreaves Lansdown all offer SIPP accounts that accept company contributions easily.