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Are you a freelancer, contractor, sole proprietor or otherwise self-employed? If you’ve set yourself up with a limited company, you can make employer contributions to your pension directly from your company in a way that’s very tax-efficient. Here’s how.

What’s so good about pensions?

A pension is nearly always a sensible part of financial planning because of tax relief on pension contributions. Tax relief is an incentive offered by the government to encourage people to save or invest money for their retirement.

Whatever your employment status, you have the potential to benefit from tax relief on personal pension contributions, up to certain limits. If you have a limited company, you can potentially benefit from the government incentive in a different way – by making employer pension contributions directly from your company. Using this method, you may be able lower your corporation tax and National Insurance bill.

Why employer contributions from a limited company are tax-efficient

The way it works is that employer pension contributions can count as an allowable business expense. Subject to certain conditions, you can subtract pension contributions from your turnover before you work out your bill for corporation tax¹.

HMRC requires that any pension contributions be “wholly and exclusively for the purposes of the trade”. Provided your arrangements pass that test, you are potentially allowed to make tax-efficient employer pension contributions of up to £40,000 a year, so long as the pension contributions do not exceed your company’s profits for that year.

What does this have to do with National Insurance?

As a business, you do not have to pay National Insurance on pension contributions. In contrast, if you were to pay yourself the same money as a salary, those funds might be subject to National Insurance, depending on the size of the salary.

The potential savings on corporation tax and National Insurance can make employer contributions a very tax-efficient way to top up your pension.

The super savvy option: big pension, small salary and dividends

Here’s where it gets really clever. One common method used by limited company owners is to make a large employer pension contribution each year while only taking a small salary. They then top up the salary with dividends from their company, provided the company has made a profit. (The amount of tax you pay on dividends depends on the size of the dividends and your other taxable income.)

How small a salary? This is an example of how this can work (but please do not consider it financial advice): If your salary is below the tax-free personal allowance (£12,500 in the tax year 2019-2020), you do not need to pay income tax on it. If it is below the lower profits limit at which self-employed people start paying National Insurance (£8,632 in this same year²), you do not need to pay National Insurance either.

Depending on your situation, the “big pension, small salary and dividends” method can be very tax-efficient, though you may want to seek guidance before you set up such an arrangement to ensure it is appropriate for you.

When can you get your money?

The good news is that since 2015, pensions are a lot more flexible than they used to be. Once you’re over 55 (likely to increase to 57 or 58, depending on your age now) you can take as much money out of your pension as you like. The first quarter of that money is tax-free and the rest is taxed as income. You can take all your tax-free cash at once or in chunks.

You have some control over how much tax you pay on your pension. For instance, you would only pay tax on pension income that exceeds that year’s tax-free personal allowance.

How Nutmeg can help

If you have a pension with Nutmeg, you can pay into it with personal or employer contributions. The difference is that with a personal contribution, we will add basic-rate tax relief automatically (Nutmeg offers what is called a “relief at source” pension). In contrast, employer contributions are not eligible for tax relief in this way because tax relief has effectively been applied already, thanks to the exemption from corporation tax.

If you don’t have a limited company but want one, it’s simple to register with Companies House.

You may like to seek advice from an accountant or tax specialist before setting up your pension arrangements. For help with your finances, our advice team are always on hand.


  1. Since 1 April 2015, corporation tax for non-ring fence profits has been 19%. This is due to fall to 18% from 1 April 2020.
  2. The figure of £8,632 a year is for Class 4 self-employed people.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.