We will be publishing a new series of short articles “something to consider”, where we will raise topics that clients may wish to consider. This month: “Should you consider a company pension contribution?”
Limited company directors in the UK can make pension contributions personally or through their limited company. These employer contributions are treated as an allowable business expense, reducing the company’s corporation tax bill.
There are other benefits to the company making pension contributions, including the contributions are paid into the pension scheme before income tax is deducted, so the director does not pay personal income tax; and neither the company nor the director pay National Insurance Contributions.
In addition, the amount the company can contribute into the pension is not limited by the director’s salary, unlike personal contributions which are capped at 100% of the director’s salary (not including dividends). However, there is a limit to the amount that can be paid into a pension by both the individual and the company each year without facing a tax charge, currently (2025/26) capped at £60,000.
For the contributions to be an allowable business expense, HMRC requires they must be made “wholly and exclusively” for the purposes of the business. For a sole director who is also the main employee, this test is usually met if the total remuneration package (salary, benefits, pension) is commercially reasonable for the work done. HMRC may scrutinise large, one-off contributions, but generally accepts commercial reasons such as building up a pension close to retirement or following a strong trading year.
Please note that this information is for educational and informational purposes only and does not constitute financial advice. The content is not intended to be a substitute for professional financial services. We are not authorised or regulated by the Financial Conduct Authority (FCA) to provide financial advice.
