For money you don't need to spend right now, an employer pension contribution is usually the most tax-efficient way to get value out of your limited company. No income tax, no National Insurance, and corporation tax relief for the company.
Quick answer
- Employer contributions are deductible for corporation tax (19%–25%).
- No employer or employee NI, and no income tax on you within your annual allowance.
- Annual allowance: £60,000, plus unused allowance from the last 3 years (carry forward).
- Unlike personal contributions, employer contributions aren't capped at your salary, which matters for directors on a low salary.
Why it beats salary and dividends
What ends up in your pension from £10,000 of company profit (higher-rate director, 2026/27):
| Route | What happens | Result |
|---|---|---|
| Employer pension contribution | Company pays £10,000 directly | £10,000 in your pension |
| Dividend, then personal contribution | £10,000 profit → £1,900 corporation tax → £8,100 dividend → £2,896 dividend tax → £5,204 net → contribute £5,204 (grossed up by basic-rate relief) | £6,505 in pension + £1,301 higher-rate relief back via your tax return |
| Extra salary, then contribution | Employer NI 15% + income tax 40% + employee NI 2% | Worse than both |
Illustrative. Assumes 19% corporation tax, dividend allowance used, and enough relevant earnings for the personal contribution route.
The employer contribution puts about 54% more into your pension than the dividend route.
The limits
Annual allowance: £60,000
Total contributions (employer + personal + tax relief) above your annual allowance trigger an annual allowance charge at your marginal rate.
Tapered allowance: if your threshold income exceeds £200,000 and adjusted income exceeds £260,000, the allowance reduces by £1 for every £2 over, to a minimum of £10,000.
Carry forward
You can use unused annual allowance from the previous three tax years, provided you were a member of a registered pension scheme in those years. Use the current year's allowance first, then the oldest year. It's useful for a large one-off contribution after a profitable year.
Money purchase annual allowance: £10,000
If you've already flexibly accessed a pension (e.g. taken taxable drawdown income), your allowance for money purchase contributions drops to £10,000.
Why the salary cap doesn't apply
Personal contributions only get tax relief up to 100% of your relevant UK earnings, i.e. salary, not dividends. A director on a £12,570 salary can only get relief on about £12,570 of personal contributions. Employer contributions have no such link to salary.
Is it always deductible?
Employer contributions are deductible if made wholly and exclusively for the business. For working directors, contributions as part of a reasonable overall remuneration package are normally accepted. HMRC may question very large contributions for family members who do little work, or contributions made on winding up.
Timing: relief is given in the accounting period the contribution is paid, not when it's accrued. Pay before your year-end if you want the deduction this year.
What about the April 2029 salary sacrifice change?
The government has announced that from April 2029, salary-sacrificed pension contributions above £2,000 a year will attract NI. That targets salary sacrifice arrangements. Direct employer contributions made as part of your remuneration, outside salary sacrifice, aren't affected by that measure.
Inheritance tax from April 2027
Unused pension funds are due to come within inheritance tax from 6 April 2027. Pensions remain highly tax-efficient for retirement income, but the estate planning case has changed, so review your plans with a financial adviser.
Practical steps
- Check your annual allowance used this year and carry forward available (ask your pension provider for statements).
- Decide the contribution with your accountant, considering profits, cash flow and your salary/dividend plan.
- Pay from the company bank account directly to the pension provider, as an employer contribution.
- Pay before your company year-end for relief this period.
- Keep the provider's confirmation.
Common mistakes
- Paying personally from dividends instead of through the company.
- Making a large personal contribution on a small salary, which limits relief.
- Exceeding the annual allowance without checking carry forward.
- Recording the contribution as director's salary in the books.
- Contributing after year-end and expecting relief in the earlier year.
Part of our series: Limited company director expenses: the complete 2026/27 guide
Related: Director salary 2026/27 · Dividend tax planning 2026/27 · Relevant life cover
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General information for 2026/27, not financial or investment advice. Speak to a regulated financial adviser about pension products and investments.