If you run a limited company in the UK, paying into a pension on your own behalf through the company can deliver powerful tax savings.
Company pension contributions reduce your corporation tax bill, avoid employer and employee National Insurance contributions and secure income tax relief at your highest personal rate.
Here’s what you need to know to get the maximum benefit.
Key Practical Considerations
1. Corporation Tax Deduction
Under Corporation Tax Act 2010, section 392, employer pension contributions are an allowable business expense “wholly and exclusively” for the purposes of your company’s trade. Each £1 you pay into a registered pension scheme cuts your company’s profit and reduces corporation tax at your marginal rate (currently 19%–25%).
2. National Insurance Relief
Pension contributions paid by the employer are not treated as salary, so they escape both employer and employee NICs. In effect, you avoid 15% employer NICs and 8% employee NICs on the same income.
3. Personal Tax Relief
Although employer contributions do not generate a personal tax credit, they do not form part of your taxable earnings, so you save up to 45% income tax that you would otherwise have paid on salary.
4. Annual Allowance Limits
The standard annual allowance is £60,000. Exceeding it leads to an annual allowance charge (income tax on excess contributions). Carry-forward of unused allowance is available for three tax years. We recommend checking if these limits apply to you.
5. Pension Scheme Requirements
Contributions must go into a registered scheme approved by HMRC. Salary exchange (salary sacrifice) arrangements must be documented and operated correctly to avoid falling foul of the so-called “disguised remuneration” rules introduced by Finance Act 2011.
Key Risks and Pitfalls
- Annual allowance charge
Directors whose total pension contribution exceeds £60,000 risk a personal tax charge at their marginal rate. If you’ve accessed flexible benefits, your allowance may be tapered down further. - Incorrect salary-exchange or “sideways” schemes may be denied tax relief under the disguised remuneration anti-avoidance measures.
For example: Meet Sarah, owner-director of Bright Ideas Ltd. Her company made £200,000 of profit in 2024/25 and would otherwise pay £38,000 corporation tax (19%)(we are assuming for simplicity the marginal increase to 25% doesn’t apply).
Scenario A: No pension contribution
Sarah pays herself a £70,000 salary.
She loses £21,000 in combined employee NIC and 40% income tax, and the company pays a further £9,750 in employer NIC (15% on salary above £5,000).
Scenario B: £40,000 employer pension contribution
Bright Ideas Ltd deducts £40,000 as a pension cost and pays just £30,400 in corporation tax (19% of £160,000), saving £7,600. No NICs arise on the £40,000.
Sarah’s taxable salary drops to £30,000, saving her £16,000 in income tax and £3,200 in NICs.
Result: Overall tax and NIC savings exceed £27,000 by using the company to pay a pension contribution, and Sarah’s retirement savings grow tax-efficiently.
Making pension contributions through your limited company is one of the most tax-efficient ways to fund your retirement.
By reducing corporate profits, avoiding NICs and trimming personal income tax, you lock in substantial savings while securing your future income.
At SAIL International we guide owner-directors through every step by doing the following:
- Assessing optimal contribution levels to exploit annual allowance and carry-forward.
- Structuring salary versus pension mix best suited to you.
- Coordinating with your accountant and pension provider to ensure timely payment and HMRC reporting.
To discuss how much you can afford to contribute, and how best to structure your agreements, please contact us here. We’ll review your company accounts, personal tax position and pension allowances to provide a tailored recommendation.
Indemnity
This article provides general guidance only and does not constitute professional tax advice. Individual circumstances vary and outcomes depend on your specific facts. SAIL International does not warrant any particular tax result. Clients should seek detailed advice before acting.