A Guide to Pension Contributions for Tax Efficiency

For UK business owners and individuals, achieving the right balance between current tax management and long-term retirement planning is essential. Pension contributions remain one of the most powerful, flexible, and tax-efficient tools available to achieve this balance.

By taking full advantage of pension contribution allowances and tax reliefs, you can significantly reduce your tax burden while investing in your future financial security.

At Agile Accountants we support limited companies, owner-managed businesses, and fast-growth start-ups across the UK in making the most of these opportunities.

In this comprehensive guide, we explain how pension contributions support tax efficiency, highlight the latest rules for 2025/26, and provide practical strategies for companies and individuals to optimise their approach.

Why Pension Contributions Support Tax Efficiency

Pension contributions continue to offer one of the most attractive forms of tax relief available in the UK.

For individuals, contributions attract tax relief at your marginal income tax rate. That means:

• 20% relief for basic-rate taxpayers
• 40% for higher-rate taxpayers
• 45% for additional-rate taxpayers

Effectively, the government is adding money to your pension pot on your behalf.

An example is, if you are a higher-rate taxpayer and contribute £10,000 gross to your pension, the net cost after all reliefs can be as low as £6,000.

For businesses, especially limited companies, employer pension contributions are a highly tax-efficient way to extract profits. They are deductible business expenses for Corporation Tax purposes, reducing the company’s tax bill while helping directors build their pension savings in a cost-effective way.

How Pension Tax Relief Works in 2025/26

For the 2025/26 tax year, the annual allowance for pension contributions remains at £60,000 or 100% of your relevant earnings, whichever is lower.

This limit applies to the combined total of personal and employer contributions made to your pension each tax year. Exceeding the annual allowance can result in a tax charge on the excess, making careful planning essential.

Key features for 2025/26:

• Tax relief is given at your marginal income tax rate (20%, 40%, or 45%).
• Basic-rate relief is typically applied automatically by your pension provider, while higher and additional-rate relief is claimed through self-assessment.
• Contributions reduce your adjusted net income, potentially lowering your tax band and saving additional tax.
• Employer contributions remain free of employer National Insurance contributions, making them an extremely efficient alternative to bonuses or salary increases.

By fully using your annual allowance, you can substantially reduce your tax liability while investing for a more secure retirement.

Employer Pension Contributions for Company Directors

Employer contributions to pensions remain a vital tax-planning tool for UK limited companies and owner-managed businesses.

Employer pension contributions are treated as allowable business expenses. This means:

• They reduce Corporation Tax by lowering taxable profits.
• They are not subject to employer or employee National Insurance.
• They do not attract Income Tax in the hands of the director or employee when contributed (although pensions are taxable when drawn in retirement, with 25% typically tax-free).

For owner-managed businesses, paying profits into a pension is often more tax-efficient than paying a dividend or a bonus.

Example:
If a company pays £20,000 into a director’s pension, it can reduce its Corporation Tax bill by up to £5,000 (at 25%), making this approach particularly attractive.

Salary Sacrifice and Pension Contributions

Salary sacrifice remains a highly effective strategy to boost pension contributions and achieve greater tax efficiency.

Under a salary sacrifice arrangement:

• The employee agrees to reduce their salary.
• The employer contributes the equivalent (or more) directly to the pension scheme.

This approach reduces:

• Income Tax for the employee.
• Both employee and employer National Insurance contributions.

Employers can reinvest National Insurance savings back into employees’ pensions or use them to reduce overall employment costs.

For business owners and directors, salary sacrifice provides a simple, cost-effective method to increase pension contributions while reducing tax liabilities.

Carry Forward of Unused Annual Allowance

If you have not used your full pension annual allowance in the previous three tax years, carry forward rules allow you to make larger contributions in 2025/26 without triggering a tax charge.

For 2025/26, this means you could potentially contribute up to £240,000 (£60,000 annual allowance plus up to £180,000 from three previous unused years, if available).

Rules to know:

• You must have been a member of a UK-registered pension scheme in each of the years from which you want to carry forward.
• You must use the current year’s allowance before you can use any carry-forward amounts.

Carry forward is particularly useful for business owners with variable profits or those looking to make significant one-off contributions in a profitable year.

Lifetime Allowance Abolished in 2024

A major change introduced in April 2024 remains in effect for 2025/26: the abolition of the Lifetime Allowance (LTA).

Previously, the LTA capped the amount of tax-relieved pension savings you could build over your lifetime (formerly £1,073,100), with savings above this limit attracting extra tax charges.

With the LTA abolished:

• There is no upper limit on the amount of tax-relieved pension savings you can accumulate.
• High earners can continue making large pension contributions without triggering LTA tax charges.

This change opens new opportunities for company directors and professionals to build substantial pension pots without punitive taxes.

Pension Contributions for Tax Planning

Beyond building retirement savings, pension contributions can be a highly effective tax-planning tool.

Examples include:

• Avoiding higher-rate tax: Pension contributions reduce taxable income. For example, a £5,000 contribution can reduce a £55,000 salary to £50,000, avoiding higher-rate tax entirely.
• Protecting Child Benefit: The High-Income Child Benefit Charge starts at £60,000. Pension contributions can reduce adjusted net income below this threshold, retaining the full benefit.
• Reducing exposure to the additional-rate band: Contributions can help avoid 45% tax on income above £125,140.

Strategic pension contributions remain one of the most straightforward and effective ways to reduce annual tax bills while investing in your future.

Family Pension Contributions

Pension contributions can also help improve tax efficiency at the family level.

Options include:

• Spousal contributions: Balancing contributions between spouses ensures both use their allowances and benefit from tax relief.
• Children’s pensions: Up to £3,600 per year can be contributed to a child’s pension, with 20% tax relief- even if the child has no earnings.

Starting pension contributions early for family members allows for decades of tax-free investment growth, providing a strong foundation for their financial security.

Aligning Pension Contributions with Business Strategy

For business owners, pensions are more than just personal savings- they are a key part of broader business and tax planning strategy.

Benefits of integrating pension planning with your overall strategy:

• More tax-efficient profit extraction than bonuses or dividends.
• Flexibility to time contributions around variable profits or cash flow.
• Helping to attract and retain employees through competitive pension schemes.

By considering pensions as part of your business’s wider financial strategy, you can improve sustainability while safeguarding your own financial future.

Using Professional Advice for Pension Planning

Pension rules can be complex and are subject to change. While the benefits are clear, seeking professional advice ensures you maximise them effectively.

Why seek advice?

• Avoid exceeding annual allowances and incurring unexpected tax charges.
• Take full advantage of salary sacrifice and carry-forward opportunities.
• Ensure employer contributions meet requirements for Corporation Tax relief.
• Align pension planning with your wider business and personal financial goals.

At Agile Accountants, we support owner-managed businesses, start-ups, and growing companies across the UK to build effective, tax-efficient pension strategies tailored to their needs.

Ready to Maximise Your Tax Efficiency?

Pension contributions remain one of the most effective ways to reduce tax liabilities while building financial security for the future.

Whether you’re a company director looking to reduce Corporation Tax or an individual planning for retirement, understanding and using pension contributions strategically is essential.

Contact Agile Accountants today to discuss how we can help you build a tailored pension contribution plan that maximises tax efficiency and supports your long-term success.