Tax Tips: The “expense” almost no Ltd director uses and why it can beat dividends

Personal Pension contributions Vs Dividends

If you run a UK limited company, you’ve probably been told the “standard play” is dividends.

But here’s the tax-manager move most directors miss, an employer pension contribution is a company expense that can be far more efficient than taking the same money as dividends.

Done properly, it can reduce your company’s taxable profits and avoid dividend tax now.

Why dividends often cost more than you think

Dividends are paid out of profits after Corporation Tax. UK Corporation Tax uses a 19% small profits rate and 25% main rate, with marginal relief between thresholds.

Then you pay dividend tax on top (above your allowance) at:

• 8.75% (basic)

• 33.75% (higher)

• 39.35% (additional)

And from April 2026, dividend tax is set to increase by 2 percentage points for ordinary and upper rates (additional unchanged).

So dividends = company tax first, personal tax second.

The “expense almost none knows”: employer pension contributions

HMRC’s position is straightforward: employer contributions to a registered pension scheme are relieved by deducting them as an expense when computing profits, reducing the employer’s taxable profit.

In other words: rather than extracting value through dividends, the company can pay into your personal pension/SIPP as an employer contribution and it’s typically treated as a deductible business expense (assuming the usual “business purpose / no identifiable non-business motive” issues).

A simple example (why this often beats dividends)

Let’s say you want to move £10,000 out of your company.

Option A: Dividend route (typical)

1. Company profits pay Corporation Tax first.

2. You then pay dividend tax at your band (and from April 2026 that gets worse for many).

Result: the same £10,000 is hit twice.

Option B: Employer pension contribution

Company pays £10,000 into your pension as an employer contribution. If deductible, it reduces taxable profits (i.e., it’s a business expense), and you’re not paying dividend tax on that amount now.

That’s why, for many director-shareholders, pension contributions are a better “extraction” tool than dividends , especially if you don’t need the cash immediately.

“But what about National Insurance?”

Employer pension contributions are generally free of NICs, and current government publications confirm they will continue to be free of NICs (even with upcoming reforms focused on salary sacrifice mechanics).

The rules you must not mess up

1) Annual Allowance

For 2025/26, the standard annual allowance is £60,000 (with tapering for higher incomes and other restrictions in some cases). Minimum tapered annual allowance can be £10,000.

2) Access age

Pensions are powerful partly because they’re locked. The normal minimum pension age is increasing to 57 from 6 April 2028 (for most people).

So if you need cash for life costs, a pension-heavy strategy may not fit.

If you’re taking dividends every month and you’ve never modelled employer pension contributions, there’s a decent chance you’re paying tax the “default way”, not the best way.

TaxHub Director Pension Check: We review your current extraction (salary/dividends), your profit level, and your pension limits — then show you a clean plan for what’s better this tax year.