Personal vs. Company Pension Contributions - which is better?

If you receive a windfall (e.g., £20,000) and want to use it for a pension contribution, you have two options:

1. Make a personal pension contribution yourself.

2. Lend the money to your company and have it pay the contribution as an employer pension payment.

Employer vs. Personal Pension Contribution

Whichever option you choose, the contribution qualifies for tax relief, but the amount of relief differs.

Income Tax vs. Corporation Tax

If you make a personal contribution, you get tax relief at your highest income tax rate.

Example: If you pay 40% tax, a £10,000 contribution saves you £4,000 in tax.

If your tax rate is 20%, you only save £2,000 in tax.

If your company makes the contribution, it gets corporation tax (CT) relief at 19%-26.5%, depending on its profits.

Since CT rates are lower than higher-rate income tax, company contributions are usually more tax-efficient.

Limits on Personal Contributions ("Relevant Earnings")

Personal pension contributions are limited to your relevant earnings (e.g., salary, but not dividends).

If you minimise your salary (e.g., taking £12,570), the most you can personally contribute is £12,570.

If you contribute £20,000, the excess £7,430 is taxed as income, meaning you lose some tax relief.

✔ Power Tip: Dividends don’t count as relevant earnings, so they don’t increase your personal contribution limit.

Why Company Contributions Can Be Better

No personal tax limits – Your company can pay in more than your salary allows.

No income tax or NI – Unlike salary, employer pension contributions aren’t taxable income or a taxable benefit.

✔ Power Tip: This makes company contributions more tax-efficient than paying yourself a higher salary and contributing personally.

A Smart Tax-Efficient Profit Extraction Strategy

Instead of giving the company your £20,000 for free, lend it the money and charge interest:

Your company can deduct interest payments as an expense, reducing CT.

You receive interest income personally, taxed at 20% (basic rate) instead of higher rates.

You must report the interest payments to HMRC quarterly, but this is a minor admin task.

✔ Power Tip: The interest rate must be at least a commercial rate to avoid HMRC scrutiny but not excessive.

Conclusion

Company pension contributions are usually better because they aren’t limited like personal contributions and provide tax relief at the corporation tax rate.

Lending your company money and charging interest is a tax-efficient way to extract profit while still benefiting from pension contributions.

✔ Final Tip: Before proceeding, check the tax rules and compare relief on personal vs. company contributions to maximise your savings.