A pension is essentially a savings/investment account that you can deposit money into tax free.
Why save for a pension?
A pension enables you to save enough so that when you retire you can enjoy a comfortable lifestyle by drawing down from your accumulated pension fund. While this means your money is not easily accessible for several years, it does come with significant tax advantages. Pension funds are not subject to tax and so income and capital grows tax-free within a scheme.
Tax savings
Paying into your own private pension (called a Stakeholder pension) has two significant benefits for contractors;
1. It’s a very tax efficient way of extracting funds from your business. You do not get taxed personally on any pension contributions, and they are fully tax deductible for your business.
2. A buffer from IR35. If you were ever determined by the HMRC to be caught by IR35, any tax and NIC due on your company income would be calculated AFTER allowing for all your pension contributions. So whatever happens regarding your IR35 status, you will never pay any tax or NIC on payments you put into your stakeholder pension.
Example 1: For a basic rate taxpayer, every £100 in dividends you receive will have had 19% corporation tax paid on them. So to take a £100 dividend, your company needs to have made a profit of £123.46. You could instead pay £123 into your stakeholder pension because pension contributions are not taxed.
Example 2: For a higher rate taxpayer, every £100 in dividends you receive will have had 25% corporation tax paid on them, AND you will need to pay personal tax on the dividend. So to take a £100 dividend, your company needs to have made a profit of £133.33, and you will have to pay personal tax of £33.75 leaving you with £66.25. You could instead pay £133 into your stakeholder pension because pension contributions are not taxed, neither through the business, nor on your personal income.
Pension rules for 2026/27
The good news is your private (stakeholder) pension is safe because pension funds cannot become insolvent. A private pension fund is carefully protected by law. Just ensure you keep to the rules;
1. The pensions savings Annual Allowance is £60,000 (Gross) **
2. Any unused Annual Allowance may be carried forward three years, provided you were a member of a registered pension scheme during those years.
3. An Annual Allowance tax charge will apply if allowances are exceeded
4. The lifetime allowance is £1,073,100.
** Tapered Annual Allowance: Your annual allowance may be lower if you have high income or have flexibly accessed your pension pot.
Pension companies are required to send an “annual allowance pension savings statement” if you paid more than the annual allowance into a pension plan with them. Note, if you are paying into more than one pension scheme, you will need to calculate this yourself. If you have contributed more than the annual allowance (Plus any unused allowance carried forward) you might be liable to a tax charge, which you must report to HMRC on your self-assessment tax return.
Autoenrollment / Workplace Pension
Automatic enrolment is the system that requires employers to assess their workers and, where applicable, enrol eligible workers into a qualifying workplace pension scheme. This normally applies where a company has workers or employees. However, it does not automatically apply just because a company has directors on payroll.
For auto-enrolment purposes, a company director is not automatically treated as a worker. A director will generally only fall within the auto-enrolment rules if they work for the company under a contract of employment and there is at least one other person working for the company under a contract of employment. Therefore, where the company only has directors and no employees, or where the directors do not have employment contracts, the company will not have automatic enrolment duties.
How to arrange a pension
Before making a contribution, we recommend confirming the following:
1. The pension scheme is a UK registered pension scheme and can accept employer contributions.
2. The contribution is paid directly from the company bank account to the pension provider.
3. The pension provider is given the correct company details and confirms how the payment should be referenced.
4. The amount is agreed and documented by the company, for example by board minute or director resolution.
5. The director has checked their pension annual allowance position, including any unused allowances, tapering, or prior pension withdrawals that may affect the tax treatment.
6. The contribution is affordable for the company and does not create cash flow difficulties.
If setting up a pension is something that appeals to you, email or call your account manager and they will be able to refer you to the pension specialist that we use. Once the pension is set-up it’s just a matter of starting a standing order payment from your business bank account, into your pension fund. And if you intend to leave the UK permanently at some point in the future, in most instances you can transfer your pension into an overseas pension fund.
IMPORTANT
Although you can make contributions into your pension up to your annual allowance each year it is important that the amounts contributed must not be larger than your corporate income for the year of the contribution, otherwise there might be questions from HMRC about whether the money was actually sourced from your trading activities.