Company director pension contributions: how the tax works

If you run your own limited company, there are three ways to take £10,000 of profit: as salary, as a dividend, or as a payment from the company straight into your pension. Each is taxed differently.

What £10,000 of company profit becomes	Basic-rate director	Higher-rate director
Company pension payment: into your pension	£10,000	£10,000
Dividend: in your pocket	£7,229	£5,204
Extra salary: in your pocket	£6,261	£5,043

These figures assume company profits of £50,000 or less, so Corporation Tax at 19%, a salary of at least £12,570 already, and your £500 dividend allowance used elsewhere. The pension figure is before any growth.

How each one is taxed

• Company pension payment. The company counts it as a business cost, as long as your whole pay package is reasonable for the work you do, so no Corporation Tax is paid on it. There's no National Insurance and no income tax when it goes in. It can't be taken until 57 (from April 2028). When it's taken, a quarter is usually tax-free and the rest is taxed as income: £8,500 of the £10,000 at 20%, or £7,000 at 40%.
• Dividend. Paid from profit after Corporation Tax at 19%. Above the £500 allowance, dividends are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above that.
• Salary. The company pays employer National Insurance at 15% above £5,000 a year, so £10,000 pays a salary of £8,696 and £1,304 of National Insurance. You pay income tax, and employee National Insurance at 8% (or 2% above £50,270).

Bigger company profits

Corporation Tax is 25% on profits over £250,000, and rises gradually from 19% to 25% between £50,000 and £250,000. At 25%, a pension payment of £10,000 saves the company £2,500 of Corporation Tax, and the same profit paid as a dividend leaves a basic-rate director £6,694.

Limits on what goes in

Company payments count towards your annual allowance of £60,000 a year, with everything else paid in. See company pension payments: the £60,000 limit and carry forward.

Your retirement income

The worked example is a director aged 50 whose company pays £30,000 a year into their pension until they retire at 60. Your money lasts to 95, with £155,541 left. Try the calculator with your own figures: the "Paying in per year" box on each pot takes what your company pays in.