How to Save Corporation Tax With Director Pension Contributions 2025/26
- JSC Accounting Team
- Oct 7
- 2 min read
If you’re running your own limited company, a pension isn’t just a way to plan for retirement, it’s also one of the most effective tools for reducing your corporation-tax bill today.
Why pensions matter for company directors
Unlike regular employees, limited-company directors can choose whether their pension contributions are made personally or directly by the company. When your company pays into your pension, those payments count as a business expense, reducing taxable profits and lowering corporation tax.
For example, if your company makes a £10,000 pension contribution, it can save up to £2,500 in corporation tax (at the 25% rate). Meanwhile, the full £10,000 goes straight into your pension, growing tax-free until retirement.
Company contributions vs personal contributions
If you pay personally into your pension, you get personal tax relief. HMRC adds 25% to your contribution (so £800 becomes £1,000 in your pot). But company contributions are often more efficient for directors, because:
They’re paid before tax, not after.
They avoid National Insurance costs on higher salaries.
They can be larger than your personal earnings if the company can justify them as “wholly and exclusively for business purposes”.
The “wholly and exclusively” rule
HMRC allows the pension contribution as a business expense if it’s appropriate for your company’s size and profits. As a rule of thumb, it should make sense commercially. For example, a company earning £100,000 contributing £10,000 is usually fine, but £80,000 might raise questions.
Annual limits
You can usually contribute up to £60,000 per tax year (or your total income, whichever is lower) across all pensions and still get tax relief. If you haven’t used your full allowance in the last three years, you might be able to carry it forward.
The simple takeaway
Director pensions are one of the few remaining legitimate ways to extract profit from your company while cutting tax. Setting up a workplace pension or SIPP (Self-Invested Personal Pension) is quick, and contributions can be adjusted whenever your cash flow allows.
Need help making sense of your taxes? JSC Accounting works with small businesses across the UK to keep things simple and compliant. Get in touch for a friendly chat about how we can help.
