Yes, in most cases. A company’s contributions to a registered pension scheme for a director are deductible against its profits if they are paid wholly and exclusively for the purposes of the trade, and relief is given for the period in which the contribution is actually paid, not when it is accrued in the accounts. There is no fixed cap on the company’s deduction, but large increases can be spread over later periods and the director’s annual allowance still applies.

What makes an employer pension contribution deductible?

Two sets of rules apply together. Section 196 of the Finance Act 2004 deals with employer contributions under a registered pension scheme. For a trading company it says the contributions are treated as not being capital payments, and that if they are allowed as a deduction they are deductible for the period of account in which they are paid. For a company with an investment business, section 196(3) treats them as management expenses referable to the accounting period in which they are paid.

Section 196 does not itself grant the deduction. HMRC’s Business Income Manual at BIM46030 says the same rules apply as for any other expense, apart from the capital question and the timing of the deduction, and in particular the contribution must be paid wholly and exclusively for the purposes of the trade under section 54 of the Corporation Tax Act 2009. The same page notes that, as part of the cost of employing staff, pension contributions are likely to be allowable.

How does the wholly and exclusively test apply to a director?

For an owner managed company, the question is usually whether the contribution is part of a genuine remuneration package. HMRC’s guidance at BIM46035 says a contribution for any director or employee will be allowable unless there is a non trade purpose, and that where the contribution is part of a remuneration package paid wholly and exclusively for the trade, it is allowable.

The point HMRC looks at is the whole package, not the pension contribution alone. BIM46035 says a problem can arise where the level of remuneration is excessive for the value of the work the individual does, and that the officer should then consider whether the overall package, including salary, benefits and pension, was paid for the purposes of the trade. HMRC should accept the deduction where the package for a director of a close company, or for a relative or friend of the director, is comparable with what unconnected employees doing work of similar value receive. The Pensions Tax Manual at PTM043200 puts it the same way for controlling directors and connected employees.

Where only part of a contribution fails the test, BIM46035 says only that part or proportion should be disallowed. In practice the risk is concentrated in cases such as a large contribution for a director’s spouse who does little work for the company, or a contribution made as part of winding the business down. HMRC’s general guidance on the wholly and exclusively rule explains the underlying test.

Why does the contribution have to be paid before the year end?

Because relief follows cash, not the accounts. BIM46010 says employer contributions are allowed for the period of account in which they are paid and no other period, so the computation adds back the pension charge in the profit and loss account and deducts contributions on a paid basis. PTM043200 adds that it is not possible to carry the contribution back or forward to other periods.

The timing point is often missed in small companies, where a director decides at the year end to make a contribution and the accountant accrues it. If the money does not reach the scheme until after the year end, the deduction moves into the following accounting period. This is a different rule from the nine month window that applies to unpaid salary and bonuses, which our page on unpaid director bonuses covers.

Is there a limit on how much the company can deduct?

Not a fixed one. HMRC’s Pensions Tax Manual at PTM024200 says that, unlike members, there is no set limit on the amount of tax relief an employer may receive on its contributions, though relief is given as a business expense and is not automatic. The member limit linked to relevant UK earnings applies to the director’s own contributions, not to the company’s.

There are two practical limits. The first is the wholly and exclusively test above. The second is spreading: BIM46010 explains that relief must be spread where employer contributions to a scheme rise by more than 210% from one period to the next, unless the increase is below £500,000. The detail is in our page on spreading large pension contributions.

What is the position for the director personally?

The contribution is not taxed as the director’s pay. Section 308 of the Income Tax (Earnings and Pensions) Act 2003 says no liability to income tax arises where an employer makes contributions under a registered pension scheme for an employee. HMRC’s National Insurance Manual at NIM02716 says that where section 308 applies, the payment is disregarded in calculating earnings for Class 1 National Insurance.

The contribution does count towards the director’s annual allowance. PTM024200 says employer contributions count towards the member’s annual allowance limit, and GOV.UK gives the annual allowance as £60,000 for the current tax year, with a tapered allowance where threshold income is over £200,000 and adjusted income is over £260,000. Unused allowance from the previous three tax years may be carried forward. See the pension annual allowance and carry forward.

How does this compare with taking salary or dividends?

A pension contribution sits between the two. Salary is deductible for the company but carries income tax and Class 1 National Insurance for the director and employer. Dividends carry no National Insurance, but section 1305 of the Corporation Tax Act 2009 says no deduction is allowed for a dividend, so they come out of taxed profits. An employer pension contribution can be deductible for the company without income tax or Class 1 National Insurance on the director at the time it is made. Our pages on salary versus dividends and pension tax relief for business owners cover the wider planning.

What does this look like in numbers?

Illustration only. A company with a 31 March year end has a sole director who works full time in the business and draws a modest salary. On 25 March 2027 the company pays £30,000 directly into the director’s registered pension scheme, and it accrues a further £10,000 at 31 March 2027 which it pays on 20 April 2027.

  • The £30,000 is deductible in the year to 31 March 2027, as it was paid in that period and the package as a whole is reasonable for a full time director.
  • The £10,000 accrual is added back in the year to 31 March 2027 and deducted in the year to 31 March 2028, when it was paid.
  • For the director, if the scheme is a defined contribution scheme, the £30,000 counts towards the annual allowance for 2026 to 2027 and the £10,000 for 2027 to 2028, because GOV.UK counts the amount paid in during the tax year. Neither payment is taxed as earnings.

What mistakes should be avoided?

  • Accruing a contribution at the year end and claiming the deduction before it is paid.
  • Paying the money to the director and calling it a pension contribution. The relief in section 196 is for contributions paid under a registered pension scheme.
  • Making large contributions for a family member whose work for the company would not justify a package of that size.
  • Forgetting that employer contributions use up the director’s annual allowance, leading to a personal tax charge.
  • Overlooking spreading where a one off contribution is much larger than the previous period’s.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.