Company Pension Contributions — The Most Tax-Efficient Way to Extract Profit
A company pension contribution is a direct payment from your limited company into your pension — made as a company expense, not via payroll. This means the company pays no employer NIC and the contribution reduces your corporation tax bill.
Why Is This More Tax-Efficient Than a Salary or Dividend?
When your company makes a pension contribution on your behalf, it is treated as an allowable business expense. This reduces your corporation tax liability at 25% (or 19% if profits fall below the small profits rate threshold of £50,000). Unlike salary, there is no employer or employee National Insurance. Unlike dividends, you do not need sufficient distributable reserves.
By contrast, extracting profit as salary attracts employer NIC at 15% on earnings above £5,000, which is a direct cost to your company.
How Much Can You Contribute?
The annual pension allowance is £60,000 per tax year (2025–26). This covers all contributions — from the company, from you personally, and any employer contributions from other employments.
If you have unused allowance from the three previous tax years, you may be able to carry forward and contribute more. This is particularly useful if your company has built up reserves.
| Method | Reduces corp tax? | NIC applies? | Max per year |
|---|---|---|---|
| Company pension contribution | Yes | No | £60,000 |
| Salary | No (NIC adds cost) | Yes | Uncapped |
| Dividend | No | No | Limited by reserves |
Timing: When Does the Contribution Count?
To count a company pension contribution against the current tax year, it must be paid before 5 April. Plan ahead — pension providers can take several days to process payments, and your bookkeeping needs to reflect the contribution in the right accounting period.
Keeping your books up to date (ideally quarterly) means you can make informed decisions before the deadline rather than scrambling in March.
Frequently Asked Questions
Q: Can I make a company pension contribution even if I also receive a salary? A: Yes. Company pension contributions are independent of your salary level, though your total pension inputs across all sources cannot exceed the £60,000 annual allowance (or your relevant UK earnings if lower).
Q: Do I need distributable reserves to make a pension contribution? A: No. Unlike dividends, company pension contributions are an expense paid from the company's cash, not from reserves. This makes them accessible even in years with lower profits.
Q: What happens to the money in the pension? A: The funds grow free of UK income tax and capital gains tax inside the pension wrapper. You can currently access them from age 55, with 25% typically available tax-free. Note that the normal minimum pension age is due to rise to 57 from 6 April 2028.
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