If you run your own limited company, you can pay into a pension fund in two ways, both of which offer significant tax advantages.
You can opt to make personal contributions or make them through the business as company pension contributions.
In this article, we examine the two options, including the tax implications, to help you make a more informed choice about how to provide for your retirement.
Contents
- Personal pension contributions
- Making company pension contributions
- Carry forward rules
- Meeting HMRC rules
- Pension contributions and IR35
- Using a SIPP
- Old pensions and consolidation
- Auto enrolment
- Get expert pension advice
- FAQs
- Further reading
Personal pension contributions
When you pay into a pension scheme out of your own income, you’ll receive tax relief based on the income tax band you fall into.
If you’re taxed at the basic rate, for every £80 you pay in, you’ll actually save £100 into your pension. The tax relief is even greater if you’re a higher (40%) or additional rate (45%) taxpayer.
Currently, there is no limit on how much you can pay into a pension; however, there is a limit on how much you can invest and still claim tax relief on. This is set at 100% of your earned income, up to £60,000 a year – the Annual Allowance.
If your income is below £3,600 p.a., you can still pay up to the same amount and receive 100% tax relief.
If you’re the director of a limited company, you can pay yourself a salary and receive dividends.
Importantly, only the money you take as income will count towards the tax relief you can claim when it comes to pension savings.
Dividends aren’t considered to be ‘relevant UK earnings’ by HMRC.
In other words, if you decide to take a smaller salary and a larger dividend from the company, your tax relief limit will be proportionately lower. You’ll be hit with tax as soon as you exceed your limit.
One way to pay more into your pension fund while still enjoying the tax benefits available is to draw a higher salary from the company.
Another option is to make contributions to your pension through your company in the form of an employer contribution (see below).
Making company pension contributions
Any contributions made by your company count towards your £60,000 annual allowance. This is the maximum pension savings an individual can contribute each tax year and benefit from tax relief.
As all eligible employer pension contributions are an allowable business expense, your company will receive Corporation Tax relief.
This means that your limited company could save between 19% and 25% in tax, depending on its annual profits for the 2025/26 tax year.
Another benefit of paying through the company is that employers aren’t required to pay National Insurance Contributions (NIC) on pension contributions.
Considering that the employers’ NIC rate for 2025/26 is 15%, you could save up to that amount by paying into a pension instead of taking the equivalent as a salary.
For the company, the savings could amount to over 30% in total if the money were paid straight into your pension fund and not paid as a salary.
Key pension figures (2025/26)
- Annual Allowance: £60,000 (or 100% of relevant earnings)
- Money Purchase Annual Allowance: £10,000
- Tapered Annual Allowance threshold: £260,000+
- Employer NIC rate: 15%
- Corporation Tax rates: 19% (≤ £50k), 25% (≥ £250k), marginal relief in between
What are carry forward rules?
As tax relief on pension contributions is restricted to the total amount of an employee’s earnings, you may want to use ‘carry forward’ arrangements if you need to make a sizeable pension investment.
The current annual allowance is £60,000, but you can carry forward unused allowances from the past three tax years to help accommodate a significant investment.
Make sure your contributions meet HMRC rules
It’s important to note that any contributions you make must comply with existing rules to qualify for tax relief.
HMRC states that pension contributions must be made ‘wholly and exclusively’ for the purposes of your business or trade.
Generally, this means that an employee’s overall remuneration should be reasonable when considering their contribution to the business. This includes salary, dividends, any other income, and pension contributions.
This shouldn’t be a problem for small companies where the director(s) are also the main fee earners.
For more on this specific point, read BIM46030, BIM46035, and the HMRC Pensions Tax Manual.
- Make sure that contributions from your company to pension funds don’t exceed that year’s annual profits.
- Make sure that the value of pension contributions to different employees is proportionate to their contribution to the business.
Pension contributions and IR35
Pension contributions made by your company are not affected by IR35.
If HMRC later decides that you should have been treated as inside IR35, any employer contributions already paid into your pension are still allowed and are deducted before calculating the deemed salary.
This means you do not lose out on contributions already made, and the company still receives Corporation Tax relief in the usual way.
However, once you are working inside IR35, the way you are paid changes. You are taxed as if you were an employee, typically through the client or agency’s payroll.
Any further pension saving would normally be through a workplace scheme set up by the fee-payer, rather than directly through your limited company.
For contractors who move in and out of IR35 engagements, this can create two different pension funding routes: company contributions during outside-IR35 contracts, and employee contributions via payroll when caught by IR35.
Care is needed to keep track of both and to make sure you stay within the Annual Allowance.
Using a SIPP
A Self-Invested Personal Pension (SIPP) is a type of personal pension that gives you control over how your savings are invested.
For limited company directors, SIPPs are popular because they accept both personal contributions and employer contributions from the company, while offering a wide choice of funds, shares, and managed options.
SIPPs work the same as any registered pension for tax purposes, so the Corporation Tax and income tax benefits described above apply in full.
The key difference is flexibility, i.e. you can take a hands-on approach to investing or keep it simple with ready-made portfolios.
One example is the Interactive Investor SIPP, which charges a low fixed monthly fee rather than a percentage of your pension pot. This can be particularly cost-effective for directors with larger balances.
Read our in-house guide to investing in a SIPP for more details.
Have you got several old pensions?
Many limited company directors have one or more ‘old’ pensions from previous employers or personal plans set up years ago. Having several pots isn’t always a problem, but it can make it harder to keep track of charges and performance.
When consolidation might help
- It’s easier to manage one plan than multiple small pots.
- Modern providers often offer lower fees and a broader range of investment options.
- You’ll have a clearer view of how much you’ve saved for retirement.
When to be cautious
- Defined benefit (final salary) pensions are usually best left where they are.
- Some older pensions may have guarantees (such as guaranteed annuity rates) that are lost if transferred.
- Exit fees can apply to older contracts.
Before moving any pension, gather the details of what you already have and take professional advice. Even small changes now can have a major impact on your retirement income.
Practical steps
Before making any decision, gather the paperwork for your existing pensions. If you are unsure of details, you can use the Government’s Pension Tracing Service to track them down.
You should always seek professional advice before making any changes to your pension arrangements, as even small decisions now can have a major impact on your income in retirement.
The choice is yours
It’s up to you to decide whether or not making employer contributions would be more beneficial than making personal pension contributions.
Hopefully, this article has provided some guidance on a complex issue. However, please note that the rules on pensions can and do change.
Always seek professional advice before deciding the most tax-efficient way to invest in a pension.
Auto enrolment for small companies
Under the Pensions Act 2008, UK employers are required to automatically enrol eligible staff into a workplace pension and make employer contributions.
- Eligibility typically refers to a worker aged 22 to State Pension age, earning at least £10,000 per year, and usually working in the UK.
- If you are a sole director with no other employees, or you only have directors without employment contracts, you are typically outside the scope.
Many small firms use the government-backed NEST scheme. See the official overview at GOV.UK: workplace pensions.
Get in touch with a pension specialist
Please complete the form below if you would like to speak to a professional pensions adviser and discuss your options.
We have worked closely with the Broadbench team for many years and use their services at LCH.
Frequently asked questions
Can I contribute to a pension if I only receive dividends?
No. Dividends are not classified as relevant UK earnings by HMRC. Personal pension contributions can only be based on income such as salary, self-employed profits, or certain benefits.
If you only take dividends from your company, you cannot obtain tax relief on personal contributions above the basic £3,600 gross allowance (£2,880 net paid in plus 20% tax relief added by the provider).
To contribute more, you would need to draw a salary or make contributions through the company as employer contributions.
Can my company pay into my spouse’s pension?
Yes, but only if your spouse is employed by or is a director of the company. Employer contributions must be part of a reasonable overall remuneration package for the duties performed.
For example, if your spouse does some genuine work for the business, the company can make pension contributions on their behalf, provided the level is proportionate to their role and the company has sufficient profits.
Contributions made without a justifiable business purpose may be disallowed by HMRC.
What if my company makes a loss?
Employer pension contributions must meet the ‘wholly and exclusively for the purposes of trade’ test (BIM46035).
If your company is loss-making, HMRC may challenge large pension payments, especially if the director’s overall remuneration looks excessive compared to the business’s turnover.
In practice, modest contributions are unlikely to be questioned. However, significant ones may not be eligible for Corporation Tax relief if the company cannot demonstrate that they are commercially justifiable. Always seek advice before paying contributions in a loss-making year.
What if the company doesn’t do well one year, but made good profits in previous years?
Pension tax relief is based on the year the contribution is made, not on historic profits. You cannot use prior years’ company profits to justify an employer contribution in a later loss-making year.
However, you may be able to use the carry-forward rules to make larger contributions if you have unused pension allowances from the past three tax years.
Carry forward works at the individual level, not the company level, so the company must still be able to demonstrate that the contribution is reasonable in the context of its current trading position.
Do employer contributions appear on my personal tax return?
No. Employer contributions are paid gross by the company and are not treated as your personal income.
They do not need to be declared on your Self Assessment return, and they do not affect your personal Annual Allowance position other than counting towards the £60,000 limit.
For the company, the contributions are recorded as an expense in the accounts and reduce taxable profits for Corporation Tax purposes.
If contributions exceed the Annual Allowance, however, you may need to declare an Annual Allowance charge on your tax return.
Can I use carry forward with company contributions?
Yes. Carry forward applies to all pension contributions, whether made personally or by your company.
If you have not used your full Annual Allowance in the previous three tax years, you can add it to your current year’s allowance.
To do this, you must first use your full £60,000 allowance in the current year before dipping into earlier years.
The company can make a larger contribution using your unused allowances, provided it is commercially justifiable and the overall remuneration package remains reasonable.
Example:
If you contributed only £20,000 in 2022/23, £30,000 in 2023/24, and £40,000 in 2024/25.
That leaves £20,000 + £10,000 + £20,000 = £50,000 of unused allowance.
In 2025/26, you can contribute £60,000 (current allowance) + £50,000 (carry forward) = £110,000 in total, assuming you have the profits to justify it and have not triggered the Money Purchase Annual Allowance.
What is the Money Purchase Annual Allowance (MPAA)?
The MPAA is a reduced allowance that applies if you have already accessed pension benefits flexibly (for example, by taking taxable drawdown income).
In this case, your Annual Allowance for money purchase contributions falls from £60,000 to £10,000 per year (as of 2025/26).
Employer contributions from your company also fall under this reduced limit once
