The most underrated tax relief available to directors
Of all the legitimate ways to reduce a tax bill, pension contributions are probably the most underused — particularly by company directors who could be making employer contributions straight from the business, rather than taking everything out as salary and dividends first and paying tax on it along the way.
The headline allowance
For 2026/27, the standard Annual Allowance is £60,000 — the maximum you (personally and via employer contributions combined) can pay into a pension in a tax year while still getting full tax relief. Go over it, and you may face a tax charge clawing back the relief on the excess.
If you haven't used your full allowance in the last three tax years, you can usually carry forward the unused amount — which can allow a much bigger one-off contribution in a strong year, provided you were a member of a registered pension scheme in those earlier years.
Tapering for higher earners
If your income is high, the £60,000 allowance can shrink. The taper applies if your adjusted income (broadly, total taxable income plus all pension contributions, including the employer's) is over £260,000 — but only if your threshold income (broadly, income before pension contributions) is also over £200,000. Both tests have to be failed for the taper to bite.
Where it does apply, the allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000 once adjusted income reaches £360,000. If you're a higher-earning director and haven't checked where you sit against these thresholds, it's worth doing before making a large contribution.
Two different routes in — and why the company route is usually better
Employer contributions (the company paying into your pension directly) are one of the cleanest tax moves available to a director:
- They're a deductible business expense, reducing the company's corporation tax bill.
- They avoid employer and employee National Insurance entirely, unlike salary.
- They don't touch your personal income tax position at all, since the money never passes through your hands as salary or dividends first.
Personal contributions from your own after-tax income also get tax relief (usually added automatically at the basic rate, with higher and additional rate relief claimed back through your Self Assessment return), but they've already been through PAYE, dividend tax or Class 4 NIC on the way to your pocket — so pound for pound, an employer contribution is almost always the more efficient route for a director.
Why this matters even more now
With dividend tax rates having risen for 2026/27 (up to 10.75% basic rate and 35.75% higher rate on dividends above the £500 allowance), the gap between "extract it and get taxed, then invest it" and "have the company pay it straight into a pension, tax-free" has only got wider. A pension contribution also doesn't push up your adjusted net income the way a dividend or bonus would, which matters if you're close to the £100,000 mark where the personal allowance starts tapering away.
Worth checking before year-end
Pension planning is very much a "use it or lose it" exercise each tax year, and it's one of the easiest things to leave until it's too late to act on. If you're not sure how much allowance you've got left, whether carry-forward applies to you, or whether employer contributions make sense for your specific numbers, that's a conversation worth having well before your year-end — not after.