How to Set Up a Director's Pension Through Your UK Company (2026)

Why Pensions Beat Everything for Company Directors

A company director who wants to save £30,000 for retirement can:

Option A — Take as salary, save personally: Company pays £30,000 salary → employee pays 40% income tax + 2% NI = £12,600 in tax → director invests £17,400 into a personal pension (and can get 40% tax relief claim via self-assessment → pension pot effectively receives £17,400 + £6,960 basic rate tax relief = £24,360).

Total to pension: approximately £24,360. Tax paid: £5,640.

Option B — Employer pension contribution: Company contributes £30,000 directly to director's SIPP → director pays zero income tax → zero NI → company gets CT deduction (£30,000 × 25% = £7,500 CT saving).

Total to pension: £30,000. Net cost to company after CT saving: £22,500. Tax paid: zero.

The winner: Option B by a wide margin. Every director with profit in their company should be making employer pension contributions.

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The Annual Allowance

• The maximum pension contribution that qualifies for tax relief in any tax year:
• Annual Allowance 2025/26: £60,000 (total employer + employee contributions)
• Money Purchase Annual Allowance (MPAA): £10,000 — if you have already accessed your pension flexibly (taken flexible drawdown or UFPLS), your allowance for defined contribution pensions drops to £10,000
• Tapered Annual Allowance: Reduces for high earners — where "adjusted income" exceeds £260,000, the allowance tapers down to a minimum of £10,000

Carry forward: You can carry forward unused annual allowance from the previous 3 tax years. If you had £20,000 unused allowance each year for 3 years, you can contribute up to £60,000 (current year) + £60,000 (carry forward) = £120,000 in one year.

No earnings = reduced allowance: Employer pension contributions (from your company) are not restricted by your personal earnings. Only employee contributions are limited to 100% of UK earnings. So as a director taking only £9,100 salary: employer contributions up to the full £60,000 annual allowance are still permitted.

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Choosing a SIPP for a Director

A SIPP (Self-Invested Personal Pension) is a pension where you (or a financial adviser) choose the investments. This is appropriate for most director-owners who want control over how their pension pot is invested.

Top SIPP providers for UK directors:

Vanguard SIPP — Very low fees (0.15% platform charge + fund fees). Limited investment choices (Vanguard funds only). Excellent for passive/index investors. Minimum: £500 lump sum or £100/month.

AJ Bell Youinvest — Broad investment choice (funds, shares, ETFs, investment trusts). 0.25% platform charge (capped at £2,500/year). Popular with active investors.

Hargreaves Lansdown (HL) — UK's largest retail investment platform. 0.45% platform charge (capped at £200/year for shares). Excellent customer service. Wide investment choice.

Interactive Investor (ii) — Flat fee (£12.99/month for SIPP). No percentage-based charges — better value for larger pots. Broad investment choice.

InvestEngine — Low cost. ETF-focused. 0% platform fee for ETF portfolios. Newer but growing rapidly.

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How Employer Pension Contributions Work

Step 1: Confirm your company's pension scheme. Your company must have a registered workplace pension scheme (or use an existing personal pension). For a director-owned company with no other employees: you don't need to set up a separate workplace scheme — you can contribute directly from the company into your personal SIPP.

Step 2: Pass a board resolution. Record the decision to make employer pension contributions in the company minutes. State the amount and timing. This creates an audit trail for CT deduction purposes.

Step 3: Transfer funds from company bank account to SIPP. Many SIPP providers have a "direct employer contribution" option — you specify the company's bank details as the paying employer, and they create a reference for payments. Or: pay from company account to your SIPP via bank transfer, with the SIPP reference number.

Step 4: Record in company accounts. Employer pension contributions are an allowable business expense — record as "Pension contributions" in your profit and loss account. Your accountant will include these in the CT600 as a deduction from profit.

Step 5: Claim CT deduction. The contribution reduces your taxable profit. At 25% CT rate: every £10,000 contributed saves £2,500 in CT. The net cost of £10,000 into your pension is £7,500 after CT saving.

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When Are Pension Contributions "Wholly and Exclusively" for Business?

• HMRC requires that expenses (including pension contributions) are incurred "wholly and exclusively" for the purposes of the trade. For director pension contributions: HMRC accepts employer pension contributions as deductible where:
• The contribution is in addition to (or instead of) reasonable remuneration
• The total remuneration package (salary + bonus + benefits + pension) is commercially reasonable for the director's role
• It is not excessive relative to the company's revenue

For a company earning £100,000/year and contributing £50,000 to the director's pension: HMRC may scrutinise whether the total package is commercially reasonable. For most owner-managed companies with moderate turnover: contributions up to the annual allowance are accepted without challenge.

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Accessing Your Pension

Pension access age: 55 currently (rising to 57 from April 2028). 25% of the pot can be taken as a tax-free lump sum (Pension Commencement Lump Sum — PCLS). The remainder is drawn as income (taxable at marginal rate) or via flexible drawdown.

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FAQs

Can my company contribute to my spouse's pension? Yes, if your spouse is an employee or director of the company. Employer contributions to a spouse-director's pension follow the same rules — commercially reasonable total remuneration, annual allowance compliance.

Can I contribute both personally and via the company? Yes. Total contributions (employee + employer) must not exceed the annual allowance (£60,000). For example: company contributes £50,000 as employer contribution; you contribute an additional £10,000 personally (with personal tax relief at your marginal rate) — total: £60,000.

What if my company has losses — can I still contribute? The company can contribute to pensions even in a loss year. The contribution increases the loss. But if the company has insufficient cash (it's loss-making), pension contributions may not be practical regardless of tax treatment.

Does a pension contribution reduce my IR35 exposure? Indirectly — higher pension contributions reduce the income you need to extract, which can reduce the PAYE liability exposure if your contracts are inside IR35. But pension contributions don't change the IR35 status determination itself.

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