For many company directors, a pension contribution paid by the company is one of the most tax-efficient ways to take money out of the business. The company can usually deduct the contribution from its profits before corporation tax, no income tax or National Insurance is due on it, and the amount is not limited by the size of your salary. Everything paid in for you each year normally counts towards the £60,000 annual allowance.
How does an employer pension contribution work?
As a director, you are an employee of your company, so the company can pay into a pension for you as your employer. The payment goes straight from the business account into your pension, whether that is a personal pension, a self-invested personal pension or a workplace scheme.
The company can normally treat the contribution as a business expense if it is paid wholly and exclusively for the purposes of the business. For a director who also owns the company, HMRC generally accepts this where your total pay package, including the pension contribution, is reasonable for the work you do. Relief is given in the accounting period in which the contribution is actually paid, so timing matters if you are planning around your year end.
How does it compare with taking a dividend?
Here is the same £10,000 of company profit taken two ways, for a director who pays tax at the higher rate and has already used the £500 dividend allowance.
Example
- As a dividend: corporation tax at 25% leaves £7,500. Dividend tax at the 2026/27 upper rate of 35.75% is £2,681. You keep £4,819.
- As an employer pension contribution: the full £10,000 is deducted from profits, so no corporation tax, income tax or National Insurance is due. £10,000 goes into your pension.
The pension money is not tax-free for ever. When you take benefits, up to a quarter can usually be taken tax-free, within the lump sum allowance of £268,275 for most people, and the rest is taxed as income at your rate at that time. The money also has to stay invested until you reach the minimum pension age, which is 55 today and rises to 57 from 6 April 2028. If your company pays the 19% small profits rate, or marginal relief between £50,000 and £250,000 of profit, the figures change, but the principle is the same.
How much can my company pay in?
The annual allowance is £60,000 for 2026/27. It covers everything paid in for you in the tax year: your company's contributions, your own, and the tax relief added to them.
Two points make company contributions particularly useful for directors:
- Your own personal contributions only get tax relief up to 100% of your relevant UK earnings. Dividends do not count as earnings, so a director on a small salary can only make small personal contributions with relief. Employer contributions are not limited by your salary.
- You can carry forward unused annual allowance from the previous three tax years, as long as you were a member of a registered pension scheme in those years. The current year's allowance is used first. This can allow a much larger one-off contribution, for example after a strong year.
Some people have a lower limit. The tapered annual allowance applies if your threshold income is over £200,000 and your adjusted income is over £260,000. Your allowance then falls by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. If you have already started drawing taxable income flexibly from a pension, the money purchase annual allowance of £10,000 applies instead.
What is changing?
Three changes are worth planning around:
- From 6 April 2027, most unused pension funds and pension death benefits are due to be included in your estate for inheritance tax.
- From 6 April 2028, the normal minimum pension age is due to rise from 55 to 57.
- From April 2029, the National Insurance saving on salary sacrifice pension contributions is due to be capped at £2,000 a year. Employer contributions paid directly by your company, rather than through salary sacrifice, are not affected by this change as announced.
It is important to remember that the tax treatment depends on your individual circumstances and may be subject to change in the future.
Is a company pension contribution right for every director?
Not always. It works best as part of a plan rather than as a year-end reflex. Things we look at include:
- how much cash the business needs to keep for working capital, tax bills and growth
- how much income you need personally, now and over the next few years
- whether you might need the money before age 57
- whether you are planning a mortgage, because lower dividends can reduce the income some lenders use
- how the inheritance tax changes from 2027 fit with your wider estate plans
Getting the mix of salary, dividends and pension contributions right can also keep your adjusted net income under £100,000, which matters for the £100,000 tax trap. Our retirement shortfall calculator shows whether your current contributions are on track for the retirement you want.
Frequently asked questions
Can my limited company pay into my pension?
Yes. As a director you are an employee of the company, so it can make employer contributions to your pension.
Are employer pension contributions tax deductible for the company?
Usually, yes. They can normally be deducted from profits before corporation tax if they are paid wholly and exclusively for the purposes of the business and your overall pay package is reasonable.
Do company pension contributions count towards my annual allowance?
Yes. Employer and personal contributions, plus tax relief, all count towards the £60,000 annual allowance for 2026/27.
Can I use carry forward with company contributions?
Yes. Unused allowance from the previous three tax years can be carried forward if you were a member of a registered pension scheme in those years, after the current year's allowance has been used.
While investing can help your money grow over time, it’s important to remember that the value of investments can go down as well as up, and it is not guaranteed.
Start with a conversation
If any of this sounds like your situation, start with a conversation. Call the office on 020 3751 5680, email office@lucro.co.uk or book a time at lucro.co.uk/contact. We will look at the whole picture, your business, your family and your plans, and tell you plainly what we think.
This article is for general information and is not personal advice. It reflects our understanding of the rules for the 2026/27 tax year for taxpayers in England, Wales and Northern Ireland. Income tax bands differ in Scotland. Tax rules can change, and how they apply to you depends on your individual circumstances.
Approver Quilter Financial Services Ltd. October 2026