What pension contributions can I make through my limited company — and why are they so tax-efficient?
Direct Answer
Your limited company can pay employer pension contributions directly into your pension with no NI charge and full corporation tax relief. A £10,000 company pension contribution costs the company just £8,100 after 19% corporation tax relief — and costs you nothing in Income Tax or NI. The annual allowance for 2025/26 is £60,000. This is the single most tax-efficient way for a Ltd company director to extract profits.
Why employer contributions beat personal contributions
| Personal contribution | Company contribution | |
|---|---|---|
| Paid from | Your salary (post-tax) | Company bank account |
| Corporation tax relief | No | Yes — 19–25% |
| Income Tax | Paid before contribution | None |
| NI charge | Employee NI already paid | None |
| Net cost of £10,000 into pension | ~£12,500 gross needed | £8,100 |
When you make a personal pension contribution, you pay it from income that has already been subject to Income Tax. When your company makes an employer contribution, it comes directly from company profits — before corporation tax — so the effective cost is 19–25% less than the face value of the contribution.
Annual allowance and limits 2025/26
| Allowance | 2025/26 |
|---|---|
| Annual allowance | £60,000 |
| Money purchase annual allowance (if flexibly drawn) | £10,000 |
| Lifetime allowance | Abolished April 2024 |
| Carry forward available | Yes — up to 3 prior years |
The pension lifetime allowance was abolished from April 2024. There is no longer a cap on how much you can accumulate in a pension — only an annual limit on new contributions.
Carry forward — using past years' unused allowances
If you have not maximised your pension contributions in previous years, you can carry forward unused annual allowance from the past three tax years. This is particularly powerful for contractors who have recently started earning well or who have had a highly profitable year and want to make a large one-off contribution.
| Tax year | Annual allowance | Contributions made | Unused allowance |
|---|---|---|---|
| 2022/23 | £40,000 | £0 | £40,000 |
| 2023/24 | £60,000 | £5,000 | £55,000 |
| 2024/25 | £60,000 | £8,000 | £52,000 |
| 2025/26 | £60,000 | Available now | £60,000 |
| Total available | £207,000 |
In this example, the contractor could contribute up to £207,000 in 2025/26 — wiping out years of unused allowance in a single highly profitable year. At a corporation tax rate of 25%, a £100,000 employer contribution saves £25,000 in corporation tax.
You must have been a member of a registered pension scheme in each year you want to carry forward from — even if you made no contributions
You use the current year's allowance first, then carry forward from the earliest year first
Your company must have sufficient profit to fund the contribution — it cannot exceed total company profits for the year
Carry forward requires careful calculation — always model with your accountant before making a large one-off contribution
The Money Purchase Annual Allowance (MPAA) of £10,000 applies if you have already flexibly drawn from a pension — carry forward does not restore it
Contractors who recently left employment and joined through a company often have large carry forward balances from years when they contributed little or nothing. If you have been contracting for 2–3 years without making pension contributions, ask your accountant to model your carry forward position — the opportunity may be larger than you expect.
Using pension contributions to reduce corporation tax
At marginal relief (company profits between £50,000–£250,000), the effective corporation tax rate is 26.5%. A pension contribution reduces your taxable profits before CT is calculated — making it one of the most powerful year-end tax tools available.
Example: Company profit £60,000 → CT at marginal rate ≈ £12,250. Add £10,000 employer pension contribution → taxable profit = £50,000 → CT at 19% = £9,500. Corporation tax saving: £2,750 from a £10,000 contribution.
At the small company rate of 19% (profits below £50,000), the CT saving on a £10,000 contribution is £1,900 — still highly significant relative to any other form of profit extraction.
Pension contributions and the £100,000 income trap
When your total income exceeds £100,000, HMRC withdraws your Personal Allowance at a rate of £1 for every £2 earned above £100,000. By £125,140 your Personal Allowance is gone entirely. The effective marginal tax rate in this band is approximately 60%.
Employer pension contributions reduce your company's taxable profit — but they do not directly reduce your personal income for Personal Allowance purposes unless structured correctly. The key is to keep your personal income (salary plus dividends) below £100,000 and route additional profit into pension instead.
The most powerful planning combination for higher-earning contractors
Contractor billing £120,000. Strategy: salary £12,570 + dividends £87,430 = £100,000 personal income (just below the taper threshold). Remaining company profit: £20,000 — contributed as employer pension. Result: no Personal Allowance taper, full pension contribution, corporation tax saving of £3,800–£5,000 on the pension alone. Without this planning, the same contractor would lose up to £10,000 in additional tax.
If your day rate puts you above approximately £430/day (£100,000 per year), this planning is not optional — it is the most important conversation to have with your accountant before the tax year ends.
What pension to use?
SIPP — Self-Invested Personal Pension
The most popular choice for contractor directors. Accepts employer contributions from your company, offers a wide range of investment options, and is available from straightforward providers including Vanguard, AJ Bell, and Hargreaves Lansdown. Suitable for the vast majority of contractors.
SSAS — Small Self-Administered Scheme
Used by business owners who want to invest pension funds in commercial property or lend back to the company. Significantly more complex and expensive to set up and run — requires a professional trustee. Not suitable for most contractors unless you have specific investment strategies.
NEST — National Employment Savings Trust
Simple, low cost, and adequate for straightforward employer contributions. Government-backed and well-regulated. A good starting point if you have not previously made pension contributions and want to begin without complexity.
Should I use a pension or an ISA?
Both are tax-efficient savings vehicles but they work differently and suit different goals. Most contractors benefit from using both — pension for long-term retirement savings, ISA for accessible medium-term savings.
| Employer pension (SIPP) | Stocks and Shares ISA | |
|---|---|---|
| Annual limit | £60,000 | £20,000 |
| Corporation tax relief | Yes — 19–25% | No |
| Income tax on contributions | None | Paid before contribution |
| NI on contributions | None | Paid before contribution |
| Access age | 57 (rising to 58 in 2028) | Anytime |
| Tax on growth | Tax-free | Tax-free |
| Tax on withdrawal | 25% tax-free lump sum; remainder taxable | Fully tax-free |
| Best for | Retirement income, large tax saving | Medium-term goals, flexibility |
For most contractors, the pension wins on pure tax efficiency — the corporation tax relief alone makes it significantly cheaper than an ISA at the point of contribution. But the ISA wins on flexibility — you can access it at any age without restriction. The optimal strategy is: maximise pension contributions to the level that keeps personal income below £100,000, then use ISA for additional savings above that.
Points to watch
Important
HMRC can challenge pension contributions that appear to be disguised profit extraction rather than genuine retirement planning. Keep contributions proportionate and commercially justifiable.
Contributions must be "wholly and exclusively" for the purposes of the trade — HMRC can challenge amounts that look like disguised extraction
Do not trigger the Money Purchase Annual Allowance (MPAA) by flexibly drawing down from your pension while still contributing — this reduces your annual allowance to £10,000
Time large one-off contributions relative to your accounting year end for maximum corporation tax benefit in the current year
If your profits are below £50,000, the CT saving is 19% — still highly worthwhile relative to salary or dividends
Pension contributions and IR35 — what changes?
Inside IR35 via umbrella — most umbrella companies offer employer pension contributions as part of their offering. The umbrella makes the contribution on your behalf, reducing their NI liability in some cases. Check the umbrella's pension terms carefully — not all umbrellas offer employer contributions.
Inside IR35 via your own Ltd company — if HMRC deems a contract inside IR35, the deemed salary payment reduces your company's available profit. Employer pension contributions can still be made from the company, but the tax position is different — the deemed salary calculation must be done first. Always model this with your accountant before making contributions during an inside IR35 contract.
Pension savings are not affected by IR35 status — money already in your pension is fully protected. IR35 affects how future contributions are taxed, not existing savings.
IR35 makes pension planning more important, not less — inside IR35, the tax saving from an employer contribution is lower than outside, but it is still the most efficient way to extract additional value from the engagement. Model both scenarios with your accountant.
How Autobooks helps
We model the optimal pension contribution for your profit level at each year end
We advise on the most tax-efficient salary/dividend/pension mix for your specific circumstances
We coordinate with your chosen pension provider on contribution amounts and timing
Pension strategy is included as part of your standard Autobooks service — not an add-on
Have pension questions? See the full Ltd Company Pension Q&A →
Getting your pension strategy right could save you thousands in unnecessary tax.
Autobooks models the optimal contribution level as part of your monthly service — from £89+VAT/month.