How to plan your pension as a limited company director

Setting up a limited company requires you to keep a keen eye on your current finances and leaves you responsible for crafting your own retirement plan. 

While crunching the numbers yourself might seem like a tall task, this independence also unlocks a highly tax-efficient route to building a pension pot, as long as you know how to leverage your company’s profits. 

From making tax-deductible employer contributions to utilising your Annual Allowance limit, there are a number of steps you can take to grow your pension efficiently.

This guide breaks down the best options available to limited company directors and outlines how to set up and manage a pension, to help you plan for your future with ease.

How do pensions work for limited company directors?

Pensions work a little differently for limited company directors compared to employees who are enrolled in traditional pension schemes.

First, there is no specific “director’s pension”. Instead, you have the flexibility to choose between three main products: a Personal Pension, a Self-Invested Personal Pension (SIPP), or a Stakeholder Pension. 

The main difference between the different types of pensions is how you make your contributions. Limited company directors have the choice to either fund their nest egg by:

1. Paying from your personal income: You can contribute from your salary after it’s been taxed. The government will then add tax relief on top of this, essentially topping up your pension pot. 
2. Paying as a business expense: You can also contribute to your pension scheme directly through your company. Since this payment is treated as a business expense, it will reduce the company’s taxable profits and its Corporation Tax bill.

While both methods offer core benefits, paying towards your pension as a business expense is by far the most tax-efficient method. This is because not only does the company save on Corporation Tax, but these contributions are also exempt from both Income Tax and National Insurance Contributions (NICs).

For example, if your company wants to put £5,000 into your pension and its Corporation Tax rate is 25%, the company’s tax bill will be reduced by £1,250. By pursuing this option instead of paying the money as a salary or dividend, you avoid paying personal tax on that £5,000, resulting in major savings for you and your business.

How do you pay into a limited company director’s pension?

If you’re a company director of a limited company, you have the choice of paying into your pension from your salary or through the company. To help you understand which option is best for you, we flesh out their setup process, benefits, and drawbacks.

Personal contributions

This route involves you paying into your pension directly from your post-tax income. It gives you complete control over your payments and is simple to set up. All you have to do is make a one-off payment or set up a direct debit to your pension provider.

When you contribute, your pension provider also automatically claims basic tax relief (20%) on your behalf. This means that for every £80 you contribute, £100 goes into your pension pot. However, if you pay income tax at higher rates (40-45%), you’re entitled to more than 20% relief, as long as you claim it through your Self Assessment tax return. 

The trade-off is that since the money is coming from your taxed income, you won’t benefit from the Corporation Tax savings that are offered by employer contributions. 

Employer contributions

Making employer contributions involves paying directly into your pension scheme. To get started, your company will need to set up a direct payment to your pension provider from its business bank account. 

The biggest perk of this method is that the pension payments will be treated as a business expense, reducing your taxable profits, while being exempt from both Income Tax and NICs. As a result, you save money in three ways, making it a highly tax-efficient way to build your retirement fund.

If you choose this method, you must ensure all contributions are “wholly and exclusively” for the purpose of the business, or HMRC may challenge the payments and disallow the Corporation Tax relief. 

It’s also important to point out that if you opt for employer contributions, there is a limit to how much you can put towards your retirement while receiving tax relief. The Annual Allowance is £60,000 for most people, or 100% of your annual income, whichever is lower.

Salary, dividends, or pension contributions — what’s most efficient?

There are three main ways limited company directors can choose to extract profits: salary, dividends, or pension contributions.

The options aren’t mutually exclusive. In fact, the most tax-efficient strategy often involves a combination of the three. Here’s a breakdown to help you understand when to use each method.  

Salary

Paying yourself through a salary is a seemingly obvious way to reap profits. Salaries count as a business expense, reducing your company’s Corporation Tax bill, don’t trigger much income Tax or NI, and also qualify you for state benefits like the State Pension. 

A common strategy for limited company directors is to pay out a salary just above the NI lower earnings limit (currently £6,396 per year) but below the threshold where NI becomes payable (around £9,100 per year). Doing so will keep your entitlement to state benefits without prompting mandatory NI contributions. 

Paying yourself a high salary, on the other hand, would be less tax-efficient as the wage would be subject to PAYE tax, and both employers and employees would be required to make NI contributions. 

Ultimately, this option is best suited for limited company managers who want access to state benefits while reducing their Corporation Tax. 

Dividends

Paying yourself through dividends is another popular way to extract profits, as they aren’t subject to National Insurance. The method is more tax-efficient than a salary, but it must come from company profits after Corporation Tax has already been paid. 

In 2026, the dividend tax-free allowance is £500. After this amount, dividend tax rates are:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

Unlike pension contributions, dividend payments can be paid flexibly and do not require monthly payroll processing. This makes the method ideal for limited company managers wanting to take profits for personal use, while keeping NI and Income Tax to a minimum. 

Pension contributions

Company pension contributions are perhaps the most tax-efficient method overall. This is because they are considered a business expense (reducing Corporation Tax), are not subject to Income Tax or NI, and benefit from tax-free growth within the pension. 

You’re able to contribute up to the current limit of £60,000 a year, and you can also carry forward unused allowance from the previous three years if you meet eligibility criteria. 

However, the major caveat is that your money is locked in the pension until you reach the minimum pension age of 55 (rising to 57 from 2028). This makes the method best suited to limited company directors looking to maximise tax efficiency, as long as they don’t need to access the funds now.  

To help you compare the options, here’s an example of what it would look like to extract £10,000 using dividends and pension contributions.

Option 1: Dividend

• The first £500 is tax-free.
• The remaining £9,500 would be taxed at the basic rate of 8.75% = £831.25 tax.
• You receive £9,168.75 net. 

Option 2: Pension contribution

• The company contributes £10,000 to your pension
• No personal tax or NI is charged
• You receive £10,000 in your pension (growing tax-free, plus the company saves Corporation Tax)

As you can see, while the dividend gives you immediate access to £9,168.75, the pension method offers better long-term value for company directors willing to wait to access profits. 

Having full control of your salary can feel like a blessing and a curse. Learn more about how to pay yourself as a business owner.

How to set up a pension as a limited company director

Interested in leveraging the tax benefits of setting up a company pension? We guide you through the most common and effective route to help you protect your financial future with ease. 

1. Choose a provider

Your first decision will be whether to choose a traditional insurer or a Self-Invested Personal Pension (SIPP).

A SIPP is the most common choice for directors because it’s structured to accept the most tax-efficient employer contributions from your limited company. It also offers more investment choices, allowing you to select from a range of options, including shares and funds. 

Alternatively, a traditional insurer offers a simpler, more hands-off approach. While this type of provider will accept employer contributions, its investment selection tends to be quite restricted and better suited for directors who value simplicity over active management. 

2. Decide on the contribution method

Next, you’ll need to decide how you’re going to contribute to your pension. As a company director, you have the choice of contributing personally or via your company.

If you choose to contribute personally, you’ll have to pay from your post-tax salary or dividends. Your pension provider will then add the Basic tax relief, and you must claim any higher rate relief through your Self-Assessment tax return.

Alternatively, your company contribution is treated as a business expense, immediately reducing your Corporation Tax liability. This money avoids all income tax and NI for you and the company, too, making it by far the superior option for tax purposes. 

3. Register contributions correctly for tax purposes

To avoid getting caught out by HMRC, you, your company, and your accountant will have to take steps to remain compliant. 

First up, your company will have to ensure all payments made from the company bank account to your pension provider are “wholly and exclusively” for the purposes of the company’s trade. Rest assured, though. Unless the payment is disproportionately large, this shouldn’t be an issue for small company directors. 

Your accountant will also have to record the payments as an Employer Pension Contribution, and you, the director, will have to ensure your total contributions do not exceed the Annual Allowance of £60,000.

4. Set up regular payments or flexible top-ups

Now it’s time to get the wheels in motion by setting up your payments. With both traditional pension providers and SIPP, the typical method is to make regular, monthly contributions. All you have to do is set up a monthly standing order from the limited company bank account.

If your company’s profits fluctuate, you also have the option to make large, one-off contributions to your pension near your company’s year-end. Doing so will reduce the Corporation Tax bill for that period, helping to keep more of your company’s money for your retirement, tax-free. 

5. Keep records for HMRC

The work isn’t over after you’ve set up the payments. You’ll also have to keep detailed records of your contributions to prove they are a valid, tax-efficient business expense. 

To follow best practices, here are some records you should keep on file:

• Bank statements showing the contribution payment
• Receipts from the pension provider
• Nominal code entries
• Screenshots of company accounts 

To avoid facing charges, you should also keep track of the Annual Allowance and Carry Forward limits of unused allowances from previous tax years. If you are a high earner, we also advise checking if you’re subject to the Tapered Annual Allowance, as this will significantly reduce the maximum amount you and your company can contribute tax-free.

To get even more clued up about your tax responsibilities, check out our guide to UK tax brackets 2025.

What happens if you don’t contribute to a pension?

Contributing to your pension isn’t mandatory. But relying on the State Pension will severely limit your future financial security and quality of life in retirement. 

The state pension in the UK is currently around £11,973 per year, a figure that is dwarfed in comparison to the average desired retirement income of £49,000, and up to ten times lower than the average CEO salary.

Without a private pension, you will be solely responsible for bridging this gap once you retire, which most people would struggle to do using taxable savings alone.

Pensions remain the easiest way to secure a comfortable retirement without paying too much in tax now, thanks to the immediate tax relief and employer contributions provided by the government.