Last updated: January 2026.
The three ways to take money out of a UK limited company
An owner-director typically has three options for moving company profits into their personal name:
| Method | Corporation tax | Income tax | NI | Capped at |
|---|---|---|---|---|
| Salary | Deductible, saves 25% | 20%/40%/45% (above personal allowance) | Employee 8%/2% + Employer 15% | No cap |
| Dividend | Not deductible (paid from post-tax profit) | 8.75%/33.75%/39.35% | None | No cap, but tax bands climb |
| Employer pension contribution | Deductible, saves 25% | Tax-free into pension | None | Annual allowance (£60,000 + carry forward) |
For value above the basic-rate dividend band, employer pension contributions usually deliver the best tax outcome, by some margin.
Worked example: a typical owner-director
James owns 100% of a UK limited company with £150,000 of trading profit. He wants to extract £20,000 to his personal name (above his basic salary and modest dividends). Comparing the three routes for that extra £20,000:
| Method | Cost to company | Tax + NI deductions | James keeps |
|---|---|---|---|
| Salary £20,000 | £20,000 + £3,000 employer NI = £23,000 (saves £5,750 CT) | £8,000 income tax + £400 employee NI = £8,400 | £11,600 |
| Dividend £20,000 | £20,000 (from post-CT profit, no CT relief) | £6,750 dividend tax (33.75% higher rate) | £13,250 |
| Employer pension £20,000 | £20,000 (saves £5,000 CT, net cost to company £15,000) | None on contribution | £20,000 in pension (25% tax-free at access) |
The pension route puts £20,000 to work for James's future at a net company cost of £15,000. The dividend route delivers £13,250 in hand today. The salary route is the least efficient by a wide margin.
The trade-off: pension money is locked up until age 55 (57 from 2028). For long-term retirement planning that's not a problem, it's the point.
How much can my company contribute?
The limit is your annual allowance:
- £60,000 for most people in 2025/26
- Plus any unused allowance from the previous three tax years (carry forward, see our carry forward guide)
- Reduced (tapered) if your adjusted income exceeds £260,000, down to a minimum of £10,000
- Reduced to £10,000 if you've triggered the Money Purchase Annual Allowance by drawing taxable income from a DC pension
Unlike personal contributions, employer contributions do not need to be backed by personal earnings. So a director taking a low salary can still receive a substantial employer pension contribution.
The 'wholly and exclusively' rule
For the company to deduct the contribution for corporation tax purposes, HMRC requires it to be wholly and exclusively for the purposes of the trade. In practice this means the contribution should be a reasonable part of the director's overall remuneration package, reflecting the work they do for the business.
HMRC's published view: a contribution is typically acceptable if total remuneration (salary + bonus + pension contribution) is in line with what an unconnected third party doing the same role would receive. Excessive contributions to a non-working spouse-director, for example, can be challenged.
Most owner-directors who genuinely run their businesses can justify substantial employer contributions without issue. Document the basis for the contribution in board minutes if you want extra protection.
Timing and end-of-year planning
Two timing windows matter:
- Company year-end: the contribution needs to be paid (not just declared) before the company's accounting year-end to count for that year's corporation tax
- UK tax year-end (5 April): the contribution needs to be received by the pension provider on or before 5 April to count for that tax year's annual allowance
For companies with non-March year-ends, these are different dates. Allow 3 working days for the bank transfer.
The optimal owner-director remuneration structure (in broad terms)
There is no single right answer, it depends on personal circumstances, business cash flow, and how much you need to draw vs. invest. But a common structure for an owner-director with adequate profits is:
- Salary at the NI Secondary Threshold (around £9,100 in 2025/26), keeps NI cost minimal while qualifying for State Pension
- Dividend up to the basic-rate band, taking advantage of the lower dividend tax rates
- Employer pension contribution for the rest, using current year allowance + carry forward, up to a reasonable level
- Leave additional profit in the company if not needed now, to be extracted later when tax rates may be more favourable, or as part of an eventual sale
The April 2027 pension and IHT change
From April 2027, unused pension funds will be subject to Inheritance Tax for the first time. This doesn't make pension contributions less worthwhile, the income tax relief and corporation tax savings remain, but it does change the inheritance planning equation. For larger pension pots intended to be left to the next generation, the strategy may shift toward drawing down sooner. See our 2027 IHT guide.
Frequently asked questions
Does the company need to pay me a salary for the contribution to be tax-deductible?
Not strictly, but HMRC requires employer contributions to be 'wholly and exclusively for the purposes of the trade' to be deductible. A reasonable salary plus a substantial pension contribution is well-established practice. A pension contribution to a director who does nothing for the business could be challenged.
Is there a limit to how much my company can contribute?
The limit is your annual allowance (£60,000 for most people, plus any carry forward). You don't need to have earnings to receive an employer contribution (unlike personal contributions, which are capped at your earnings). But the company still needs to demonstrate the contribution is reasonable for the work you do.
Should I take dividends or pension instead of salary?
For most owner-directors, the optimal mix is: a small salary at the National Insurance threshold (to qualify for State Pension and use the personal allowance), substantial dividends up to the basic-rate limit, and pension contributions for higher-rate income that would otherwise be taxed at 40%.
Can I take the money out of the pension if I need it?
Yes, from age 55 (rising to 57 in 2028). 25% is tax-free, the rest is taxable as income. For directors needing access before that age, pension is the wrong vehicle, keep that money in the business or in an ISA instead.
What happens if I sell the business?
Pension funds are personal, they don't transfer to a new owner. Any pension you have through the business stays with you. Sale proceeds can be used to make further pension contributions in the year of sale (subject to annual allowance and earnings), which is often a strong move alongside Business Asset Disposal Relief planning.