Limited company directors can make pension contributions directly from their company as an employer — cutting Corporation Tax while building a pension with no Income Tax or NI. For owner-directors, this is one of the most powerful tax planning tools available. Here is the full guide for 2026/27.
Why Employer Pension Contributions Beat Personal Contributions
When a director takes a salary and then makes a personal pension contribution, the money has already been subject to Income Tax and (possibly) National Insurance. The director then claims tax relief — but only gets back what was already paid.
Employer contributions are different:
| Contribution type | Paid from | Income Tax | NI | CT deduction |
|---|---|---|---|---|
| Personal contribution | Post-tax salary | Paid, then reclaimed | Paid | No |
| Employer contribution | Company funds | None | None | Yes — saves CT |
A director extracting £10,000 from their company as salary (higher rate taxpayer):
- Tax + NI: approximately £4,200
- Net received: approximately £5,800
- Then contributes to pension: £5,800 (personal contribution)
The same £10,000 as an employer pension contribution:
- Corporation Tax saving at 25%: £2,500
- Net cost to company: £7,500
- Director’s pension receives: £10,000 (no deductions)
Key Numbers for 2026/27
| Amount | |
|---|---|
| Annual Allowance (total pension input) | £60,000 |
| Corporation Tax (main rate, profits > £250,000) | 25% |
| Corporation Tax (small profits rate, profits ≤ £50,000) | 19% |
| NI on employer pension contributions | 0% |
| NI on director’s salary above £9,100/year | 15% employer + 8% employee |
The Optimal Director Strategy
Most tax-efficient directors use a combination approach:
- Pay a salary of £12,570/year (equal to the personal allowance — no Income Tax; NI starts but is minimal)
- Extract additional profit as dividends (taxed at dividend rates, no NI)
- Make employer pension contributions for long-term savings (Corporation Tax relief, no NI, no IT)
For a director earning £80,000 in company profits:
| Extraction method | Tax cost | Net received / pension |
|---|---|---|
| All salary | ~£24,000 IT + NI | ~£56,000 |
| Salary + dividends | ~£14,000 combined | ~£66,000 |
| Salary + dividends + £20,000 employer pension contribution | Pension: £20,000 tax-free; CT saving: £5,000 | Pension: £20,000 + £61,000+ from other extraction |
Annual Allowance: The Limits
The Annual Allowance caps total pension contributions (employer + employee) at £60,000 per year. For directors:
- Employer contributions count towards this limit
- Personal contributions also count
- The Money Purchase Annual Allowance (MPAA) of £10,000 applies if you have already flexibly accessed pension income — in this case, employer contributions over £10,000 trigger a tax charge
If you have unused Annual Allowance from the previous three tax years, you can carry it forward and make larger contributions in a single year.
Carry Forward: Supercharging Contributions in a Good Year
If your company has a profitable year, you may want to make a large employer contribution. Using carry forward:
- 2023/24 unused AA
- 2024/25 unused AA
- 2025/26 unused AA
- Plus current year £60,000
This could allow a single contribution of up to £240,000 (if previous years had full unused allowances) — but the company must have had the profits to support it, and the contribution must still be wholly and exclusively for the business.
“Wholly and Exclusively” — The HMRC Test
For a pension contribution to be deductible for Corporation Tax, it must be “wholly and exclusively” for the purposes of the trade. HMRC may challenge contributions that appear disproportionate to the director’s role or services.
Factors HMRC considers:
- Is the contribution commensurate with the director’s role and remuneration?
- Would the company pay the same amount to an unconnected employee in the same role?
- Is there a history of pension contributions, or is this a one-off before company closure?
For most working directors, contributions up to the Annual Allowance are unlikely to be challenged if the director is genuinely working in the business.
How to Set Up Employer Contributions
- Choose a pension scheme — a SIPP (Self-Invested Personal Pension) or group personal pension. Ensure it accepts employer contributions.
- Set up the employer contribution — via the pension provider’s employer portal or by BACS transfer to the scheme.
- Record in company accounts — the contribution is a deductible expense on the profit and loss account.
- Report on company tax return (CT600) — deducted from trading profits.
- Report on P11D or via RTI — employer pension contributions do not need to be reported on a P11D (they are not a benefit in kind).
See our self-employed pension contributions guide, limited company working from home expenses, and Self Assessment for directors.