Company pension — questions answered
What this page covers
Direct answers to pension questions for UK limited company directors — employer contributions, corporation tax relief, annual allowance, SIPPs, auto-enrolment, and why most contractors are missing the most tax-efficient extraction method available to them.
Can my limited company pay into my pension?
Direct Answer
Yes — and it's the most tax-efficient way to extract profit from a limited company. Employer contributions are fully deductible against corporation tax with no Income Tax and no NI. A £10,000 contribution saves £1,900–£2,500 in corporation tax depending on your rate.
What is the tax saving on company pension contributions?
Worked example — £10,000 employer contribution
| At 19% small profits rate | Saves £1,900 — effective cost £8,100 |
| At 25% main rate | Saves £2,500 — effective cost £7,500 |
| At 26.5% marginal relief rate | Saves £2,650 — effective cost £7,350 |
| Income Tax on contribution | £0 |
| National Insurance on contribution | £0 |
What is the pension annual allowance for 2025/26?
| Allowance | 2025/26 |
|---|---|
| Annual allowance | £60,000 (or 100% of earnings) |
| Money purchase annual allowance (MPAA) | £10,000 (if pension already drawn flexibly) |
| Lifetime allowance | Abolished April 2024 |
| Carry forward | Up to 3 prior years unused allowance |
Employer vs employee contributions — what's the difference?
Employer contribution
Paid from company bank account
Deductible against corporation tax
No Income Tax, no NI
£10,000 in pension costs company £7,500–£8,100
Employee contribution
Paid from your salary after Income Tax and NI
Basic rate tax relief reclaimed automatically
Higher rate relief requires Self Assessment claim
Less efficient — tax already paid on this money
What pension should I use as a limited company director?
Most directors use a SIPP (Self-Invested Personal Pension) — flexible, wide investment choice, straightforward for employer contributions. Popular providers: Vanguard (low cost), AJ Bell (good range), Hargreaves Lansdown (largest UK platform). Open in your own name, pay employer contributions from the company bank account directly to the provider.
How do I set up a company pension contribution?
Open a SIPP with Vanguard, AJ Bell, or Hargreaves Lansdown — takes 15 minutes online
Make a bank transfer from your company account to the pension provider, quoting your SIPP reference
Tell your accountant — they record it as an employer pension contribution in your bookkeeping
The contribution reduces your taxable profit and corporation tax bill automatically at year end
Can I use pension contributions to reduce corporation tax?
Worked example — marginal relief band
| Company profits — no pension | £60,000 |
| Corporation tax (marginal rate) | ~£12,250 |
| Add £10,000 employer pension contribution | Profits reduce to £50,000 |
| Corporation tax at 19% flat rate | £9,500 |
| Corporation tax saving | £2,750 |
Can I carry forward unused pension allowance?
Yes — if you have been a member of a registered pension scheme for the previous three tax years (even with zero contributions), you can carry forward unused allowance. In a high-profit year you could potentially contribute up to £240,000 (four years at £60,000). This requires careful calculation — speak to your accountant before acting.
Do I need to set up auto-enrolment as a sole director?
Most sole director limited companies are exempt from auto-enrolment — if you are the only director with no other employees, or your directorship is not under a written contract of employment. You should notify The Pensions Regulator of your exemption at tpr.gov.uk. This does not stop you making voluntary employer pension contributions into your own SIPP.
Is it better to take dividends or pay into a pension?
For most contractors, employer pension contributions are more tax-efficient than dividends for the same money. Dividends are taxed at 8.75% (basic rate) or 33.75% (higher rate). Pension contributions go in tax-free, grow tax-free, and 25% comes out tax-free at retirement. The trade-off is that pension money is locked away until age 57 (rising to 58 by 2028). Most contractors benefit from a combination — dividends for now, pension contributions for the longer term.
How much should a contractor contribute to a pension?
A practical starting point is 10% of annual contract income as an employer contribution. On a £400/day contract (~£88,000/year), that's £8,800/year — saving approximately £1,672 in corporation tax. The right amount depends on your profit level, tax position, and personal plans. Your accountant should model the optimal figure for your situation.
Can I contribute to my spouse's pension through my limited company?
Not directly — employer contributions must go to the pension of an employee or director of the company. If your spouse is a director or employee of your company, your company can make employer contributions to their pension in the same way as yours. However, the contribution must be commercially justifiable — HMRC can challenge contributions that appear disproportionate to a director's role or salary. If your spouse does genuine work for the company, employer contributions to their pension are a legitimate and highly tax-efficient strategy. Always document the employment relationship properly.
What happens to my pension if I close my limited company?
Your pension is completely separate from your company and is not affected by closing it. A SIPP or other personal pension is held in your name, not the company's name. Closing the company does not affect the pension in any way — the investments continue to grow, and you access the pension at the normal minimum age (currently 55, rising to 57 in 2028). If you have set up a company-specific scheme such as an SSAS, the wind-up of that scheme requires separate steps — your financial adviser will guide you through this.
Should I use a pension or an ISA?
Both serve different purposes. A pension wins on tax efficiency at the point of contribution — employer contributions get corporation tax relief of 19–25%, which an ISA does not. An ISA wins on flexibility — you can access it at any age, whereas pension access is restricted to age 57 from 2028. For most contractors the optimal approach is: use employer pension contributions to keep personal income below £100,000 and maximise corporation tax relief, then use a Stocks and Shares ISA for medium-term savings above that. The pension for retirement, the ISA for flexibility.
At what age can I access my pension?
The minimum pension access age is currently 55, rising to 57 in April 2028. From age 57 you can take up to 25% of your pension as a tax-free lump sum, with the remainder taxable as income when drawn. You can take the full amount at once or draw it down gradually — most people use flexible drawdown to manage their tax position in retirement. Taking large amounts in a single year pushes you into higher rate tax, so staged drawdown over several years is typically more efficient.
Can I make a large one-off pension contribution using carry forward?
Yes — this is one of the most powerful tax planning tools available to contractors. If you have unused annual allowance from the past three tax years, you can contribute more than the standard £60,000 annual allowance in a single year. In theory, a contractor with three years of fully unused allowance could contribute up to £220,000 in 2025/26 (£60,000 current year plus up to £160,000 carried forward from 2022/23, 2023/24, and 2024/25). In practice, the contribution cannot exceed the company's total profit for the year, and the calculation must be modelled carefully with your accountant. Carry forward is particularly powerful in a highly profitable year or when approaching retirement.
What if I have already started drawing from my pension?
If you have flexibly accessed your pension — taken income from a drawdown fund, not just the tax-free lump sum — the Money Purchase Annual Allowance (MPAA) of £10,000 applies. This replaces the standard £60,000 annual allowance and cannot be increased by carry forward. The MPAA exists to prevent people recycling pension withdrawals back in as new contributions to get repeated tax relief. If you are still contracting and plan to make significant employer contributions, do not access the drawdown portion of your pension until you have finished contributing — take only the tax-free lump sum if you need cash.
Why do most contractors not use company pension contributions?
Because nobody tells them about it. Compliance-focused accountancy — filing returns on time — does not include proactive tax planning. The pension conversation requires a specialist contractor accountant who reviews each client's position annually. Most don't. The result: thousands of contractors pay more corporation tax every year than they need to.
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