Question 1

Can a director pay into a pension through their company?

Accepted Answer

Yes. A UK limited company can make employer pension contributions on behalf of a director. These contributions are an allowable business expense that reduces the company's corporation tax bill. Unlike personal contributions, employer contributions are not limited by the director's relevant UK earnings — only by the £60,000 annual allowance and the requirement that they are 'wholly and exclusively' for the purposes of the trade.

Question 2

How much corporation tax does a company save on pension contributions?

Accepted Answer

The corporation tax saving depends on the company's profit level. For profits above £250,000, the main rate is 25%, so every £1 of employer pension contribution saves 25p in corporation tax. For profits below £50,000, the small profits rate of 19% applies, saving 19p per £1. Profits between £50,000 and £250,000 are subject to marginal relief, producing an effective rate between 19% and 25%.

Question 3

Is an employer pension contribution better than taking dividends?

Accepted Answer

From a pure tax perspective, employer pension contributions are typically more tax-efficient than dividends because they avoid both corporation tax and dividend tax. However, the money goes into a pension (accessible from age 55, rising to 57 in 2028) rather than your bank account, and HMRC may query contributions that are disproportionately large relative to the company's profits. The right balance depends on your personal circumstances — speak to your accountant.

Question 4

What is the 'relevant earnings' trap for director pension contributions?

Accepted Answer

Personal pension contributions are limited to 100% of your relevant UK earnings — and dividends do not count as relevant earnings. So a director paying themselves only the personal allowance salary of £12,570 could only make £12,570 in personal contributions. However, employer contributions from the company are not subject to this limit — they can be up to £60,000 (the annual allowance) regardless of salary level. This is why the employer contribution route is strongly preferred by most directors.

Employer pension contributions — the most tax-efficient extraction route?