Pension and Salary Sacrifice for Company Directors
What Is Salary Sacrifice?
Salary sacrifice is an arrangement where you agree to give up part of your salary in exchange for your company making a pension contribution of the same amount. Because the pension contribution is made by the employer, it avoids both employee's and employer's National Insurance.
For company directors who control their own salary, salary sacrifice (or more precisely, making employer pension contributions instead of salary) is one of the most tax-efficient ways to extract profits.
The Tax Savings
Without Salary Sacrifice
Director takes £50,000 salary:
- Employer's NI (13.8% above threshold): approximately £5,200
- Employee's NI: approximately £2,700
- Income tax (after Personal Allowance): approximately £7,500
- Corporation Tax saving (salary is deductible): £12,500 (at 25%)
- Net to director: approximately £39,800
- Total tax and NI: approximately £15,400
With Salary Sacrifice (£12,570 salary + £37,430 employer pension contribution)
- Salary: £12,570 (at or below Personal Allowance and NI threshold)
- Income tax on salary: £0
- Employee's NI on salary: minimal
- Employer's NI on salary: minimal
- Pension contribution: £37,430 (no NI, no income tax, Corporation Tax deductible)
- Corporation Tax saving: £12,500 (at 25% on total £50,000 cost)
- Total tax and NI: approximately £1,000
Saving: approximately £14,400 per year
The pension contribution is not accessible until pension age, so this strategy only works if you do not need the full £50,000 as current income. But for retirement saving, it is extraordinarily efficient.
How It Works in Practice
Most director-controlled companies do not use formal salary sacrifice agreements. Instead, the director simply sets a low salary (typically £12,570 to use the Personal Allowance) and the company makes direct employer pension contributions.
The effect is the same — the company pays into the pension, saving NI on both sides and reducing Corporation Tax.
The Mechanics
- Set your salary at £12,570 per year (using the full Personal Allowance)
- Take dividends as needed for living expenses (taxed at dividend rates: 8.75% basic, 33.75% higher)
- Have the company contribute to your pension as an employer contribution
- The pension contribution is a Corporation Tax deductible expense
- No NI on the pension contribution from either side
Combining with Dividends
The optimal extraction strategy for most company directors is:
- Salary: £12,570 (covers Personal Allowance, minimal NI)
- Employer pension contributions: up to the annual allowance
- Dividends: for remaining income needs (taxed at dividend rates after the £1,000 dividend allowance)
This combination minimises total tax and NI while building retirement savings.
Limits and Considerations
Annual Allowance
Total pension contributions (employer and personal) must not exceed £60,000 (2025/26) or 100% of earnings. Your earnings include both salary and any other employment income.
"Wholly and Exclusively" Rule
Employer pension contributions must be "wholly and exclusively for the purposes of the trade." HMRC may challenge contributions that seem disproportionate to the director's role or salary. Contributions must be reasonable in the context of the business.
Impact on Other Benefits
Salary sacrifice reduces your official salary, which can affect:
- Mortgage applications (lenders look at salary)
- Statutory sick pay and maternity pay entitlements
- Life insurance and other salary-linked benefits
State Pension
If your salary is below the NI Lower Earnings Limit, you may not build State Pension qualifying years. The current threshold for a qualifying year is earnings of £6,396 per year. A salary of £12,570 is comfortably above this.
Is It Right for You?
Employer pension contributions are most beneficial if you:
- Do not need the full amount as current income
- Are focused on building retirement savings
- Want to minimise tax and NI
- Have a limited company with sufficient profits
Track your company profits and personal income with Accounted to plan the optimal extraction strategy.
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Tax & Compliance Specialists
Our tax specialists have decades of combined experience in UK sole trader and small business taxation, MTD compliance, and HMRC submissions. All content is reviewed against current HMRC guidance before publication and updated quarterly to reflect legislative changes.
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