The triple tax advantage
Salary is taxed and attracts National Insurance; dividends come from post-Corporation-Tax profit. An employer pension contribution avoids all of that at the point it’s paid:
- Corporation Tax: the contribution is a deductible cost, reducing the company’s tax bill
- National Insurance: none — employer or employee
- Income tax: none now; taxed only when you draw the pension, and 25% is usually tax-free
For a director who doesn’t need every pound as spending money today, that combination frequently beats both extra salary and extra dividends.
The £60,000 annual allowance
Most people can put up to £60,000 a year into pensions (2025/26) across all contributions. Two things to watch:
- Tapering: high earners can have the allowance gradually reduced
- Money purchase annual allowance: if you’ve already flexibly accessed a pension, you may be limited to £10,000
If you were a pension member in earlier years, you can also carry forward unused allowance from the previous three tax years — sometimes allowing a much larger one-off company contribution in a high-profit year.
The 'wholly and exclusively' test
For the company to deduct the contribution, it must be wholly and exclusively for the trade — in practice, justifiable as part of your reward for working in the business. Normal contributions for an active director are fine; a huge contribution to someone who does little for the company could be challenged. This is rarely an issue for genuine owner-managers.
Company into your SIPP
The company can pay employer contributions directly into your personal pension or SIPP. Because it’s an employer contribution, it isn’t capped by your salary the way personal contributions are — a key reason directors on a small salary plus dividends still fund large pensions through the company.
Get the mix right
The efficient answer blends salary, dividends and pension to suit your profits and personal position — and it’s best decided before year end. We’ll model it and make sure the contributions are structured correctly. Call 0114 327 1480. (We’re accountants, not regulated financial advisers — for pension product advice, speak to an IFA.)