As we approach the end of the 2025/26 tax year, one of the questions we often get asked is how can I improve my tax position? Or how much income have I received as you are often thinking about the tax that will be due.

One option that’s often overlooked until the last minute is pension contributions.

Used properly, pensions can be one of the most tax-efficient ways to extract profit from your business, while also building long-term wealth.

Personal Pension Contributions: How the Tax Relief Works

If you make a personal pension contribution before 5 April, you’ll usually receive tax relief at your marginal rate.

For 2025/26:

  • Basic rate taxpayers receive 20% relief at source

  • Higher and additional rate taxpayers can claim further relief via their tax return

Fore example:

  • A £10,000 pension contribution could cost a higher-rate taxpayer as little as £6,000–£7,000 net, depending on their position

  • It can also help reduce your taxable income, potentially bringing you below key thresholds (e.g. higher rate band)

This can be particularly useful if:

  • Your income has been higher than expected this year

  • You’re close to a tax threshold

  • You want to reduce your overall personal tax liability

Company Pension Contributions: A More Tax-Efficient Route

For directors of limited companies, director pension contributions are often more efficient than personal ones.

When your company pays into your pension:

  • The contribution is typically treated as an allowable business expense

  • This means it can reduce your corporation tax bill

For 2025/26 corporation tax rates:

  • 19% for profits up to £50,000

  • 25% for profits over £250,000

  • A marginal rate applies in between

So, for example:

  • A £10,000 employer pension contribution could save up to £2,500 in corporation tax.

Why This Is More Efficient Than Taking Salary

If you were to take that same £10,000 as salary instead:

  • Your company would pay employer’s National Insurance

  • You would pay income tax and employee National Insurance

In contrast, a pension contribution:

  • Has no National Insurance

  • Doesn’t increase your personal taxable income

  • Still removes profit from the company (reducing corporation tax)

This is why many directors use pensions as part of a tax-efficient remuneration strategy, rather than relying solely on salary or dividends.

Timing: Why Acting Before the Year End Matters

Pension contributions count towards your annual allowance for the tax year in which they are paid.

For most individuals, the standard annual allowance is:

  • £60,000 for 2025/26

If unused, you may be able to carry forward allowances from the previous three tax years, provided you were a member of a pension scheme.

However, once the tax year ends:
you lose the ability to use that year’s allowance moving forward (beyond carry forward rules)

A Balanced Approach

For many business owners, the most effective approach is a combination of:

  • A tax-efficient salary

  • Dividends where appropriate

  • Employer pension contributions to extract additional profits efficiently

The right balance will depend on:

  • Your income needs

  • Your company’s profit levels

  • Your long-term plans
Final Thoughts

Pension contributions aren’t just about saving for later, they’re a practical tax planning tool that can make a real difference before the tax year ends.

Whether you contribute personally, through your company, or a mix of both, the key is understanding how they fit into your overall strategy.

With the 5 April deadline approaching, it’s one of the last opportunities to take action for the 2025/26 tax year.

Written by Danielle Biggins & Shannon McDonald