A company paying into its director's pension is asking two separate questions at once, and they have different answers. The first is whether the company gets a corporation tax deduction for the payment, which turns on the wholly and exclusively test in the Corporation Tax Act. The second is how much can go in before a tax charge lands on the director personally, which turns on the annual allowance.
The deduction, and the test that decides it
HMRC's Business Income Manual states that a pension contribution by an employer to a registered pension scheme for a director or employee is an allowable expense unless there is a non-trade purpose for the payment. Where the contribution is part of a remuneration package paid wholly and exclusively for the purposes of the trade, it is deductible. The relevant law is section 54 of the Corporation Tax Act 2009 for companies and section 34 of ITTOIA 2005 for unincorporated businesses.
What a non-trade purpose looks like in practice
HMRC's own guidance names the situation to watch: where the level of the remuneration package is excessive for the value of the work the individual does for the employer. The test is then applied to the whole package rather than to the pension contribution alone. HMRC also warns its own officers not to challenge a deduction on annual comparisons alone, and to read the history of remuneration and contributions before doing so.
The allowance that caps the amount
The deduction question is not the same as the allowance question. GOV.UK puts the pension annual allowance at £60,000 for this tax year, covering everything paid in by the individual and by the employer together. A lower allowance applies where threshold income is over £200,000 and adjusted income is over £260,000, which is where a director drawing a substantial salary and dividends needs the arithmetic done properly.
Why the company route is usually the efficient one
An employer contribution is not treated as the director's earnings, so it carries no employee or employer National Insurance, and the company's corporation tax deduction is at the rate the company actually pays, which is 25% above the upper profit limit and 19% below the lower one. That is the whole of the arithmetic that makes the company the natural payer, and it is why the deduction test matters more here than the headline rate does.
Questions people ask about director pension contributions
Is there a limit on what the company can contribute?
There is no separate corporation tax cap on the contribution itself. The limits are the wholly and exclusively test on the deduction and the annual allowance on the director's side, currently £60,000 including everything paid in by both parties, reduced where the threshold and adjusted income tests bite.
Does the contribution have to relate to salary?
No. Unlike personal contributions, an employer contribution is not restricted by the individual's relevant earnings. What HMRC looks at instead is whether the overall remuneration package is commercially justified by the work the director does for the company.
When does the company get the deduction?
Generally in the accounting period in which the contribution is paid rather than when it is accrued, so a contribution intended to reduce a particular year's profit has to leave the company's bank account inside that period. Large contributions can be required to be spread across periods.
Does this page give advice on my own contributions?
No. It sets out what HMRC publishes and where to read it. Whether a contribution is deductible on your company's facts, and whether it is the right thing for your retirement, are questions for an accountant and an authorised adviser respectively, and an enquiry from this site goes to a firm that does that work.