Employer pension contributions: the most tax-efficient extraction route

A £10,000 salary costs the company £10,000 plus employer National Insurance at 15%, and the director pays income tax and employee National Insurance on receipt. A £10,000 dividend comes from profit already taxed at 19% or 25% and is then taxed again at 10.75% or 35.75%.

A £10,000 employer pension contribution is a deductible business expense with no National Insurance and no income tax at the point of contribution. Tax is paid later, on drawdown, with 25% normally available tax free within the lump sum allowance.

The annual allowance is £60,000 across all contributions, employer and personal. Unused allowance from the three previous tax years can be carried forward if you were a member of a registered scheme in those years.

High earners face a tapered annual allowance, and anyone who has flexibly accessed a pension is restricted by the money purchase annual allowance. Both need checking before a large contribution.

Unlike personal contributions, an employer contribution is not limited by your earnings, which is why it works for directors on a £12,570 salary.

Corporation tax relief requires the contribution to be wholly and exclusively for the purposes of the trade. For a working director on a modest salary, a contribution that brings total remuneration to a commercially reasonable level is normally accepted.

The risk case is a large contribution for a spouse or family member who does little or no work. Relief there can be denied. Keep the total package defensible against the role performed.

Pay from the company bank account to a registered scheme, not personally and not via reimbursement. Relief is given in the accounting period in which the contribution is paid, so the money must leave before the year end to affect that year.

Record it as an employer contribution with the provider. Miscoded personal contributions create tax relief claims that do not match the accounts.

Rates, thresholds and deadlines quoted here reflect the 2026/27 UK tax year. Check current GOV.UK guidance, or ask us, before relying on them for your own company.