For company directors, pension contributions remain one of the most tax-efficient ways to extract profits from a limited company.

Unlike salary, employer pension contributions are not subject to Income Tax or National Insurance and are usually deductible for Corporation Tax purposes.

For businesses paying Corporation Tax at 25%, a £20,000 employer pension contribution could reduce the company’s tax bill by up to £5,000.

Why employer contributions are usually more efficient

Many directors continue to take a low salary with dividends. In these cases, personal pension contributions can become restrictive because tax relief is linked to earnings.

Employer contributions avoid this issue.

For example:

• A director taking a salary of £12,570 may only receive personal tax relief on contributions up to that level
• However, the company can usually contribute up to the full annual allowance as an employer contribution, subject to HMRC rules

This makes employer contributions significantly more flexible for owner-managed businesses.

The 2026/27 annual allowance

The standard annual pension allowance remains £60,000.

This includes:

• employer contributions
• personal contributions
• third-party contributions across all pension schemes

Exceeding the allowance may trigger an Annual Allowance Charge.

Watch for the tapered annual allowance

For higher earners, the annual allowance may reduce once adjusted income exceeds £260,000.

The minimum tapered allowance is currently £10,000.

This is an area where directors can accidentally create unexpected tax charges, particularly where income is made up of dividends, bonuses and other investments.

Salary sacrifice can still reduce national insurance

Some directors may also benefit from salary sacrifice arrangements.

By exchanging salary for employer pension contributions, both employer and employee National Insurance savings may arise.

However, salary sacrifice is not suitable in every case and should be reviewed alongside mortgage applications, borrowing requirements and overall remuneration planning.

Timing matters

Pension contributions must usually be received by the pension provider before the company year-end to obtain Corporation Tax relief in that accounting period.

Leaving contributions until the final days of the tax year can create problems if payments are delayed or providers have processing cut-offs.

Pension planning should form part of wider director tax planning

For many owner-managed businesses, pension contributions remain one of the few genuinely tax-efficient extraction strategies still available.

However, the right approach depends on:

• company profitability
• existing pension balances
• remuneration structure
• retirement objectives
• available carry forward allowances

Pension contributions can be highly effective when structured correctly alongside wider director remuneration planning. To discuss the potential tax efficiencies of planned pension contributions and wider director tax planning, contact your usual bk plus advisor.