Should I pay pension contributions through my company or personally?

For limited company directors the method of making pension contributions has a significant impact on the overall tax efficiency of the contribution. The comparison between company (employer) contributions and personal (individual) contributions reveals a clear advantage for most directors in paying through the company.

When your company makes a pension contribution directly to a registered pension scheme on your behalf as a director or employee, the contribution is an allowable business expense. It reduces the company's taxable profits and therefore reduces the Corporation Tax payable. If the company pays the standard Corporation Tax rate of 25% on profits above £250,000, a £10,000 contribution saves £2,500 in Corporation Tax. If the company is in the small profits band at 19%, a £10,000 contribution saves £1,900.

Crucially, employer pension contributions are not subject to National Insurance. Neither the company's employer NI (13.8%) nor the director's employee NI (8% on earnings between £12,570 and £50,270, or 2% above) applies to employer pension contributions. This is a significant saving compared to taking additional salary and then contributing personally.

When you make a personal pension contribution from your own post-tax income, tax relief is added to the pension. For a basic rate taxpayer, you pay in £8,000 and the pension provider claims £2,000 tax relief from HMRC, giving a gross contribution of £10,000 at a net cost of £8,000. Higher rate taxpayers can claim the additional relief (20% on top of the basic 20% relief already added) through their Self Assessment return, so a £10,000 gross contribution costs a 40% taxpayer £6,000 net.

However, personal contributions do not save National Insurance. The same £10,000 paid as salary and then contributed personally incurs employer NI of £1,380 (13.8% of £10,000) and employee NI of £800 (8%) at earnings in the standard band, on top of income tax. Even after the personal pension tax relief, the net cost is higher than making the employer contribution directly.

The annual allowance for pension contributions in 2025/26 is £60,000 gross. This covers both employer and employee contributions to the same pension scheme. If total contributions (employer plus employee across all pensions) exceed £60,000 in a year, an annual allowance charge applies, effectively taxing the excess.

There is also a rule that personal pension contributions cannot exceed your UK earnings in the year. Employer contributions are not subject to this earnings cap, but they must be justifiable as a commercial arm's length payment for the services provided. HMRC can challenge employer contributions that are disproportionate to the director's role or salary. For a working director, contributions that represent a commercially reasonable remuneration package are generally accepted.

A practical approach for many directors is to pay the minimum salary through PAYE and make the bulk of their remuneration as pension contributions through the company (where building retirement assets is the goal) or as dividends (where liquidity now is preferred). The pension route is more tax-efficient in the long run but locks the money away until pension access age (currently 57 from April 2028).

For directors whose income approaches or exceeds £100,000, employer pension contributions are particularly valuable because they reduce the company's profits (and the director's income if taken as salary) without affecting the director's personal income calculation. However, personal pension contributions also reduce adjusted net income for the purpose of the personal allowance taper, which can recover up to 20p of allowance per pound contributed between £100,000 and £125,140.

The treatment of VAT and pension is not an issue: pension contributions are outside the scope of VAT regardless of who makes them.

Always check the pension scheme accepts employer contributions directly, as some personal pensions (particularly older plans) are set up only for individual contributions. Workplace pension schemes and SIPPs (Self-Invested Personal Pensions) routinely accept employer contributions.