Pay £60,000 Into Your SIPP From the Company — Dividends Net 52p of Every £1, Pension Routes Net 85p

Dividend rates have ratcheted up in three waves since 2021/22. For the current tax year, HMRC charges 10.75% basic, 35.75% higher and 39.35% additional rate on dividends above the £500 allowance. The £500 allowance is one-tenth of what it was in 2017/18.

Stack that on top of corporation tax. A small company under £50,000 profit pays 19%; over £250,000 it pays the main rate of 25%; the marginal slice between those thresholds is taxed at an effective 26.5%. So a higher-rate director extracting from a profitable company faces a combined corporation-tax-plus-dividend bite of roughly 47-52p per £1 of profit. That is not a typo. Half of every pound earned by the company is gone before it reaches your current account.

The pension route bypasses both taxes at the point of contribution. An employer pension contribution is a deductible business expense — corporation tax saved at the company's marginal rate. It carries no employee or employer National Insurance. And it doesn't count as a benefit-in-kind on the director's P11D. Three taxes vanish in one transaction.

Run it line by line for a higher-rate director with £74,074 of pre-corporation-tax profit available — the figure that yields exactly £60,000 of dividend headroom after the small-profits rate.

Dividend route:

• Profit £60,000
• Corporation tax at 19% = £11,400
• Distributable as dividend = £48,600
• Higher-rate dividend tax (35.75%) on £48,100 after the £500 allowance = £17,196
• Net to director: £31,404

Pension contribution route (same £60,000 profit):

• Company contributes £60,000 to director's SIPP
• Corporation tax saving on the deduction = £11,400 (stays in the company for next year)
• Director's pension grows by £60,000 immediately, untaxed
• At retirement: 25% tax-free lump sum (£15,000) plus £45,000 taxable
• Drawn down over 5+ years inside the basic-rate band → 20% tax = £9,000
• Net to director: £51,000 (over time)

The pension route nets 62% more for the same pre-tax profit. The gap widens for additional-rate directors (paying 39.35% on dividends) and for companies trapped in the marginal-relief band where corporation tax bites at 26.5%. The Bank of England base rate is 3.75% — even five-year fixed cash savings yield 4.5% — but no risk-free product on Earth pays a 62% return on the same input. This is yield-pickup hiding inside the tax code.

The annual allowance is £60,000 for 2026/27. Personal contributions are capped at your relevant earnings — usually a problem for directors who pay themselves the £12,570 salary plus dividends, because dividends don't count as relevant earnings. A £12,570 salary caps personal pension contributions at £12,570.

Employer contributions face no such cap. The company can pay up to the full £60,000 annual allowance into your SIPP regardless of how much salary you draw, provided the contribution passes the wholly and exclusively for the purposes of the trade test. For a working director, that test is normally trivial — HMRC accepts pension contributions as remuneration in lieu of salary or dividends.

Unused allowance from the previous three tax years can be carried forward. A director who has never made a pension contribution can fund up to £200,000 in a single year (£60k current year plus three years of £60k carry-forward, subject to having been a member of a registered pension scheme in those years). At 26.5% marginal corporation tax that's a £53,000 corporation tax deduction in one stroke. Most accountants will flag carry-forward when reviewing year-end accounts, but you'd be surprised how many directors don't ask the question.

The taper kicks in above £200,000 of threshold income or £260,000 of adjusted income — relevant if you draw a substantial salary plus large dividends. Below those numbers the £60,000 figure stands.

From 6 April 2027 unused pensions become part of the IHT estate. HMRC estimates 38,500 estates will pay more IHT, with around 10,500 estates pulled into the IHT net for the first time. The headline reads worse than the maths.

IHT applies only to the unspent residue at death. If you draw the pension during retirement and spend it — exactly what pensions are designed to do — there's no IHT on what you've spent. The change penalises pots that were being used as multi-generational wealth vehicles. For most director-shareholders it changes nothing about the case for funding the pension in the first place: you're funding it to retire on, not to bequeath.

Compare the alternative. Take £60,000 as a dividend, pay £17,196 in dividend tax, then place the £31,404 net in a GIA (because your £20,000 ISA allowance is already used). Within an estate worth more than the £325,000 nil-rate band plus the residence band, that £31,404 is fully exposed to 40% IHT — and you've already paid 47% income tax to get it there. Versus a pension where the income tax shelter alone saves you £19,000 today, and where any spend-down before death erases the IHT issue.

The gap at year 25 is £188,410 — and that's before counting the 25% tax-free lump sum or the basic-rate drawdown discount. The IHT change shaves a corner off the death-benefit case. It does not flip the in-life maths.

Three traps trip up sensible owner-managers.

Trap one: the 'I need access' reflex. Pension money is locked until 57 (rising to 57 in April 2028). If you're 47 with a mortgage to overpay, kids to educate and a business to scale, locking £60,000 a year for ten years feels reckless. The fix: tier the extraction. Use dividends and salary for current spending; route only the surplus — the money you'd otherwise sweep into a GIA — through the pension. If you can't fund your lifestyle from non-pension income, you weren't going to invest the surplus anyway. Don't strand working capital in a SIPP, but don't strand surplus capital outside one either.

Trap two: confusing personal and employer contributions. Your personal contribution limit is your salary. Take the typical £12,570 director's salary and you can personally contribute £12,570 gross with basic-rate relief. The remaining £47,430 of allowance must come from the company. Most directors hear 'pension contribution' and think 'salary sacrifice'; for a sole-director ltd, the right framing is 'employer contribution paid by my own company'.

Trap three: ignoring carry-forward. A 45-year-old director who hasn't contributed for three years has £180,000-£240,000 of headroom. That gets you through any plausible Reeves clampdown on annual allowances — and the SIPP relief structure has survived every Chancellor since 2015 without a serious cut. The marginal cost of using carry-forward in 2026/27 is zero. The opportunity cost of letting it expire is whatever 26.5% corporation tax saving on £180k turns into over twenty years of compounding. That's six figures.

Set this up properly and the contribution lands in your SIPP on the same accounting period it deducts from your corporation tax bill.

1. Confirm your SIPP accepts employer contributions. Most do — Hargreaves Lansdown, AJ Bell, Vanguard, Interactive Investor, Fidelity. The contribution arrives gross with no tax relief added (because the company has already had the deduction).
2. Pay the contribution from the company bank account directly to the pension provider. Personal payment from your own account followed by reimbursement from the company is a paperwork mess and HMRC may treat it as a personal contribution.
3. Time it before the company's accounting year-end. A contribution made on 31 March (for a 31 March year-end) hits this year's CT computation. A contribution made on 1 April hits next year's.
4. Keep a board minute documenting the contribution as part of remuneration policy. Standard accounting hygiene; helps satisfy the wholly and exclusively test if HMRC ever asks.
5. For carry-forward: confirm pension scheme membership in each of the three previous tax years. A dormant SIPP from a previous employer counts. No prior membership means no carry-forward.
6. Review the tapered annual allowance if your total income exceeds £200,000. A taper to £10,000 at the top end changes the answer.

The whole transaction can be done with a single bank transfer and a five-line board minute. There's no clever planning required. The reason most directors don't do it is that the dividend route is the default — and the default loses you 30p of every £1.

For the broader trade-offs around when to use a SIPP versus other wrappers, see our SIPP guide and the pensions hub. For the case against locking everything in retirement wrappers, the LISA-versus-pension trade-off article is the contrarian read.

This article is for informational purposes only and does not constitute financial advice. Tax planning for limited company directors depends on personal circumstances — your retirement plans, current income, business cash flow, and the rules in force when you contribute and draw. The figures in this article reflect 2026/27 rates and the rules announced as at May 2026; legislation can and does change. You should seek independent financial advice from a qualified adviser before making any investment or extraction decisions.