Bottom line: For most directors, once you've taken your £12,570 salary and £37,700 in basic-rate dividends, any surplus profit should go into an employer pension contribution — not as higher-rate dividends. The tax saving on a pension contribution is roughly double what you'd keep after higher-rate dividend tax.
The situation most growing directors reach
You've set your salary at £12,570. You've taken dividends to fill the basic rate band — that's £50,270 in total income. Your company still has money sitting in it. Now what?
You have two main options for that surplus profit:
- Option A: Pay yourself more as dividends — but now at the higher rate of 33.75%
- Option B: Make an employer pension contribution — the company pays directly into your pension, with no income tax and no NI for either party
Most directors choose Option A without doing the maths. The maths strongly favours Option B.
Side-by-side comparison on £20,000 of surplus profit
| Higher-rate dividends | Employer pension | |
|---|---|---|
| Company pays corporation tax first? | Yes — ~25% on this profit | No — pension contribution is deducted before CT |
| Corporation tax cost | ~£5,000 | £0 |
| Personal tax on receipt | 33.75% dividend tax | £0 (tax deferred until retirement) |
| Amount you actually receive / accumulate | ~£9,750 in your pocket | £20,000 in your pension pot |
| Difference | Pension is worth ~£10,250 more | |
Put simply: for every £20,000 of surplus company profit, the pension route puts roughly twice as much away as the higher-rate dividend route. The company pays less tax. You pay no immediate personal tax. The full £20,000 goes to work for you.
How employer pension contributions work
An employer pension contribution is made by your company directly into your pension — it's not a personal contribution. This distinction matters:
- It doesn't count as your personal income, so it doesn't affect your income tax or dividend bands
- The company deducts it from profit before calculating corporation tax — so the CT saving is immediate
- There's no employer NI on pension contributions (unlike salary)
- There's no employee NI or income tax for you personally
The only limits: the contribution must not exceed your "relevant UK earnings" in that tax year, and it must be "wholly and exclusively" for business purposes. For a director with a salary of £12,570, the relevant earnings limit means contributions must be commercially justified — most accountants recommend ensuring salary is in place before making large pension contributions.
Golden nugget: the annual allowance gives you room
The annual pension allowance is £60,000 per tax year. If you haven't maximised pension contributions in the previous three years, you can carry forward unused allowance — potentially contributing far more than £60,000 in a single year. This is a significant planning tool for directors who've been running profitable companies for a few years without making pension contributions. A financial adviser can model your specific carry-forward position.
The case for dividends over pension
Pension contributions aren't always the answer. There are real situations where higher-rate dividends make more sense:
- You need the cash now. Pension money is locked away until age 57 (rising from 55 to 57 in April 2028). If you have a property purchase, a business reinvestment, or a family expense coming up, dividends give you the liquidity a pension cannot.
- You're already well-funded for retirement. If you have substantial pension savings and property assets, adding more to the pension may not be the priority.
- You're close to the Lifetime Allowance. While the LTA was abolished in 2023, very large pension pots still attract tax on lump sums and some drawdown above certain thresholds. If your pot is already £1 million+, get specialist advice before contributing more.
The £100,000 income threshold interaction
If your combined salary and dividends are approaching £100,000, an employer pension contribution does double duty. It reduces company profit (and therefore your dividend capacity), keeping your personal income away from the £100,000 threshold where the personal allowance begins to taper. Staying below £100,000 can be worth up to £5,028 in additional personal tax savings — stacked on top of the CT saving on the contribution itself.
Golden nugget: don't wait until January
Most directors think about pension contributions at the end of the tax year in January or April. By then, the options are limited. The smarter move: review your projected profit quarterly. If profits are tracking above your dividend extraction capacity, make the employer pension contribution mid-year — before the corporation tax liability crystallises. The CT saving is the same; you just get the planning benefit earlier.
The practical decision framework
Ask yourself: do I need this money in the next 10 years? If yes — take dividends, pay the tax, have the cash. If no — pension almost always wins on the numbers. The combination most directors end up with: dividends to fill the basic rate band (for living expenses), pension for everything above that. This balances liquidity and tax efficiency without having to choose one or the other.
Written by Desh Naidoo-Cann · Founder, Apex Assets Group · MBA Finance
Apply this to your numbers
Frequently asked questions
Can I access my pension before 57?
What is carry forward and when should I use it?
Is there a minimum salary to make an employer pension contribution?
Important: This article is for general information only and does not constitute tax or legal advice. Tax rules change — always verify with HMRC or a qualified accountant before making decisions. Published 8 April 2026 for 2026-27.