For an owner-managed company, employer pension contributions remain one of the most tax-efficient ways to extract value — and following the dividend tax rate increases that took effect in April 2026, they have just become more attractive still.
Employer pension contributions are the most tax-efficient profit extraction route for owner-directors in 2026/27 — fully corporation tax deductible, with no income tax or National Insurance on the contribution. The annual allowance is £60,000 (with up to three years of carry-forward), but from 6 April 2027 unused pension pots will be brought into the IHT estate.
But two big changes are reshaping the planning landscape: the inclusion of unused pension funds in the inheritance tax (IHT) net from 6 April 2027, and the £2,000 cap on tax-free salary sacrifice pension contributions from 6 April 2029. This 2026/27 guide explains how company contributions work today, what has changed, and what every director-shareholder should be reviewing now.
⚠️ Two Upcoming Changes to Plan Around
- 6 April 2027: Unused pension pots brought into the IHT estate — pensions will no longer sit outside the IHT net
- 6 April 2029: £2,000 annual cap on NI-free salary sacrifice pension contributions
The Director-Shareholder Position
A director who also owns shares in the company occupies a uniquely flexible tax position. Income can be drawn as salary, dividends, employer pension contributions, or a combination. Each route has a different tax cost, and the optimal mix changes whenever rates change — as they did for dividends from April 2026.
This flexibility is one of the key reasons many business owners operate through a limited company. But it requires active, annual review — the optimal structure in 2025/26 is not necessarily the optimal structure in 2026/27.
How Employer Pension Contributions Are Taxed
When the company pays into a director’s pension scheme, three things happen at once:
🤔 Three Tax Benefits — Simultaneously
- Corporation tax relief: the contribution is deductible against company profits, provided the wholly and exclusively test is satisfied. For most owner-managers earning a market-rate role, HMRC accepts the contribution as part of a reasonable remuneration package.
- No income tax for the director: the contribution is not taxable as employment income, provided it stays within the annual allowance.
- No National Insurance — for now: neither employer nor employee NI is charged on employer pension contributions. From 6 April 2029, this NI exemption will be capped at £2,000 per year for salary sacrifice arrangements.
The 2026/27 Annual Allowance
The standard pension annual allowance is £60,000 for 2026/27 — unchanged from 2025/26. This includes employer contributions, personal contributions, and any growth in defined benefit accruals.
For high earners, the tapered annual allowance reduces the £60,000 limit by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. Employer contributions count towards the adjusted income calculation — so a large employer contribution can itself trigger or worsen the taper.
📅 Carry-Forward — Still Available
- Unused allowance from the previous three tax years can be brought forward
- The director must have been a member of a registered pension scheme in those years
- The current year’s allowance is used first, then carry-forward from the earliest year available
- This can allow a single large contribution — useful where company profits were unusually high in one year
Optimise Your 2026/27 Remuneration
Free review of your salary, dividend and pension mix — including the April 2027 IHT impact.
Salary vs Dividends vs Pension — 2026/27 Comparison
The dividend rate increases announced in the Autumn 2025 Budget have widened the gap further in favour of pension contributions for owner-managers who do not need the cash immediately.
| Extraction Route | Total Tax Leakage (Higher-Rate Director) | Notes |
|---|---|---|
| 📈 Dividend (post-CT profit) | ~35.75% income tax | Higher-rate dividend rate increased from 33.75% to 35.75% from April 2026 |
| 💼 Salary | Income tax + 8% employee NI + 15% employer NI | CT deductible but heavy combined NI burden. Optimal salary ~£5,000–£12,570 depending on Employment Allowance eligibility |
| 🏢 Employer Pension | 0% income tax, 0% NI on the contribution | CT deductible. Funds locked until age 55 (57 from April 2028). IHT exposed from April 2027 |
For a higher-rate taxpaying director, the contrast is stark. A £10,000 dividend costs approximately £3,575 in personal tax — on top of the corporation tax already paid on the underlying profit. A £10,000 employer pension contribution costs nothing in income tax or NI, and is fully deductible against corporation tax at either 19% or 25% depending on the company’s profit level.
The trade-off is liquidity — pension funds cannot be accessed until age 55 (rising to 57 in April 2028). For directors who need the cash now, dividends or salary remain the route. For those who can defer, pension funding is compelling.
The April 2027 Inheritance Tax Change
This is the most significant planning consideration for 2026/27. From 6 April 2027, most unused defined contribution pension pots and certain death benefits will be brought into the deceased’s estate for IHT purposes. Pensions will no longer sit outside the IHT net.
⚠️ What This Means in Practice
For a director with a £400,000 SIPP and a home worth £500,000, the IHT bill on death could rise dramatically — potentially adding £80,000 or more depending on circumstances. For deaths after age 75, beneficiaries also pay income tax on withdrawals, so the combined effective rate on the pension pot can exceed 60%.
What this means for the salary-versus-pension decision: pension contributions are still extremely tax-efficient during the director’s lifetime, but the long-held assumption that the pot also avoids IHT no longer holds from April 2027. Directors with substantial estates should revisit whether maximum pension funding remains the right strategy beyond a certain pot size — and whether lifetime giving, trusts or other structures should feature alongside pension planning.
This does not mean stop contributing. For most directors, the lifetime tax efficiency of pension contributions still outweighs the IHT cost at death — especially where carry-forward is available and the contribution secures immediate corporation tax relief at 25%. But it does mean the planning conversation has become more nuanced.
Practical Rules to Get Right
📋 Compliance Checklist for Director Pension Contributions
- Pay the contribution before year-end: the corporation tax deduction lands in the period the contribution is paid, not declared. Plan ahead of the company’s accounting date.
- Document board approval: a board minute confirming the contribution as part of a reasonable remuneration package supports the wholly and exclusively test if HMRC enquires.
- Stay within the annual allowance: exceeding it triggers an Annual Allowance Charge at the director’s marginal rate, wiping out the relief.
- Watch the tapered allowance: if adjusted income exceeds £260,000, model the taper carefully — employer contributions count towards adjusted income and pension growth in defined benefit schemes counts too.
- Use carry-forward where available: up to three prior years of unused allowance can be added to the current year’s £60,000 — potentially allowing a single contribution of up to £240,000.
- Confirm the scheme is registered: contributions must go to a registered pension scheme to attract tax relief. Most SIPPs and workplace schemes qualify.
✅ Key Takeaways — 2026/27
- Employer pension contributions remain the most tax-efficient extraction route for owner-managers who can defer access — 0% income tax, 0% NI, fully CT deductible
- The April 2026 dividend tax rate increases (basic 10.75%, higher 35.75%) have made pensions relatively even more attractive than dividends
- The annual allowance is unchanged at £60,000 for 2026/27. Carry-forward from the previous three years is available
- From 6 April 2027, unused pension pots will form part of the IHT estate — this fundamentally changes estate planning for directors with substantial pension wealth
- From April 2029, salary sacrifice pension contributions above £2,000/year will be subject to NI
- Pay contributions before the company year-end and document board approval — both critical for HMRC compliance
- If your adjusted income is above £260,000, model the tapered allowance carefully before making contributions
Frequently Asked Questions
Are employer pension contributions tax deductible for a limited company?
Yes — employer pension contributions are deductible against company profits for corporation tax purposes, provided they satisfy the wholly and exclusively test. For most owner-managers with a market-rate role, HMRC accepts the contribution as part of a reasonable remuneration package.
What is the pension annual allowance for 2026/27?
The standard pension annual allowance is £60,000 for 2026/27, unchanged from 2025/26. This includes employer contributions, personal contributions, and defined benefit accruals. The tapered annual allowance reduces this for adjusted income above £260,000, down to a minimum of £10,000.
Will pensions be subject to inheritance tax from 2027?
From 6 April 2027, most unused defined contribution pension pots and certain death benefits will be included in the deceased’s estate for IHT purposes. Pensions will no longer sit outside the IHT net, significantly changing the planning landscape for directors with substantial pension pots.
📚 Related reading
- Company Car Tax 2026/27 — Pension and EV are both highly tax-efficient extraction routes — model both in your own situation.
- Employee Share Schemes 2026/27 — For staff, pension and share schemes are two of the most powerful retention tools.
Shamim is a Chartered Tax Adviser and Fellow of the ACCA with over 13+ years of experience in UK and international tax. He specialises in owner-managed business tax planning, including remuneration strategies, pension planning and profit extraction for director-shareholders.
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🔗 Related reading
- Pension contributions sit alongside salary and dividends in profit extraction — see the dividend tax guide for directors.
- For the full picture, read how much tax you actually pay in 2026/27.