Tax Advice

Contributing to Your Pension via a Limited Company

For directors running their own limited companies, pension contributions aren’t just about retirement—they’re one of the most flexible levers for tax and cash-flow planning.

Key Angles

1. More than a “perk”

An employer contribution counts as a deductible expense. That means less corporation tax, no National Insurance, and the full amount lands in your pension. Compared with paying yourself a dividend or salary, the uplift can be dramatic.

2. Corporation tax relief

At the 25% rate, every £10,000 your company pays into a pension trims £2,500 off the tax bill. That’s money you’d otherwise never see.

3. National Insurance

Employer contributions aren’t subject to the 15% employer NI charge (2025/26 rate) or the 2% employee NI above the main thresholds. That makes them cleaner than salary.

4. Annual allowance flexibility

Personal contributions are capped at your “relevant earnings.” Dividends don’t count. Employer contributions sidestep that limit—as long as the company has profits and the contribution passes HMRC’s “wholly and exclusively” test. You can also carry forward unused allowances from the previous three years.

5. Commercial reasonableness

HMRC looks at the overall package—salary, dividends, benefits, pension. If you’re the only director and main generator of profits, a large contribution is usually defensible. But if you employ staff, parity matters.

Detailed Worked Example

Scenario

  • Limited company with pre-tax profit: £100,000

  • Sole director, no other staff

  • Wants to extract £20,000 either as a dividend or as an employer pension contribution

Option A – Dividend

  • £20,000 dividend declared

  • Higher-rate dividend tax at 33.75%: £6,750

  • Net received now: £13,250

  • Corporation tax still payable on £100,000 profit: £25,000

Option B – Employer Pension Contribution

  • £20,000 company contribution to director’s pension

  • Treated as deductible expense → taxable profit falls to £80,000

  • Corporation tax at 25%: £20,000

  • Effective company tax saving: £5,000

  • Full £20,000 lands in pension

  • Total “value sheltered”: £25,000 (£20,000 contribution + £5,000 tax saved)

Comparison

  • Dividend route = £13,250 now

  • Pension route = £25,000 future wealth inside pension

  • Effective uplift: 89% more than taking the dividend

Practical Considerations

  • Cash flow: lump sums can be timed around year-end; regular monthly contributions smooth things out.

  • Lifetime allowance: abolished for now, but future governments could revisit—worth keeping in mind if you’re contributing heavily.

  • Investment choice: SIPPs and SSASs give directors control, including property or business-related investments in certain cases.

  • Succession planning: pensions sit outside your estate for inheritance tax purposes, adding another dimension to strategy.

Alright, let’s run the numbers with your £150,000 pre-tax profit example, and build it into a mini case study. I’ll keep it clean, side-by-side, with a simple P&L feel so it’s easy to visualise the cash flows.

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Case Study: £150,000 Pre-Tax Profit

Scenario

  • One-person limited company, no staff.

  • Director wants to extract £30,000.

  • Two options: dividend vs employer pension contribution.

  • Corporation tax rate: 25% (2025/26).

  • Dividend tax: 33.75% (higher-rate band).

  • Employer NI: 15% (but not due on pension contributions).

Option A: Take £30,000 as Dividend

Company P&L (simplified)

  • Profit before director’s dividend: £150,000

  • Corporation tax (25%): £37,500

  • Profit after tax: £112,500

  • Dividend declared: £30,000 (paid from post-tax profits)

Director’s Cash Flow

  • Dividend received: £30,000

  • Dividend tax (33.75%): £10,125

  • Net in hand: £19,875

Company retained profit after dividend

  • £82,500

Option B: Employer Pension Contribution (£30,000)

Company P&L (simplified)

  • Profit before contribution: £150,000

  • Employer pension contribution: £30,000 (deductible expense)

  • Adjusted profit: £120,000

  • Corporation tax (25%): £30,000

  • Profit after tax: £90,000

Director’s Cash Flow

  • Immediate cash in hand: £0 (contribution goes into pension)

  • Pension contribution: £30,000

  • Corporation tax saving compared with Option A: £7,500

Effective value sheltered

  • £30,000 pension + £7,500 tax saving = £37,500 inside the pension wrapper.

Company retained profit after contribution

  • £90,000

Side-by-Side Comparison

What it means

  • Dividend: £19,875 in the director’s pocket today, after taxes.

  • Pension: £30,000 invested for the future, plus £7,500 shaved off the corporation tax bill.

  • In other words, the pension route creates an 89% uplift in value compared with the dividend, at the cost of immediate liquidity.