Pensions: the contractor's last great tax shelter
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No tax scheme touches a pension for pure efficiency: company contributions are a deductible expense, dodge both corporation tax and dividend tax entirely, and the money compounds tax-free.
The pecking order for a PSC
- Employer contribution from the company — best. Deductible against corporation tax (19–25%), no NI, no benefit-in-kind. Contributes straight from profit before you'd otherwise extract it as dividends.
- Salary sacrifice — relevant for umbrella/inside workers: cuts both income tax and employee NI.
- Personal contribution — relief at your marginal rate claimed via self-assessment; fine, but you've already paid corporation tax on that money.
Numbers on a £100k-profit year
Extracting £20,000 as dividends costs £20,000 of already-taxed profit (dividend tax ~£3,375 at higher rate inside the band). The same £20,000 as an employer pension contribution costs the company £20,000 pre-corporation-tax — an effective saving of £4,000–£5,000 versus dividend extraction, plus growth.
Watch the allowances
Annual allowance is £60,000 (2026/27) with carry-forward of unused allowance from the previous three years; the taper bites high earners. Your take-home tables assume zero pension by default — the calculator has a pension percentage input to model it.
Verify allowances at gov.uk; not financial advice.
Salary vs dividends vs pension: the £10,000 test
Take £10,000 of company profit and route it three ways. As additional salary: income tax 40% + NI 2% costs you £4,200, plus employer NI 15% costs the company £1,500 — worst on both sides. As dividends: 33.75% dividend tax costs £3,375 — simple but fully taxed. As employer pension: £0 tax now, tax-deferred growth, and taxable (at your future rate) only on withdrawal after 57. The pension route wins on pure arithmetic whenever your retirement-band rate is lower than today's. The only caveats: money is locked until 57, and lifetime-abolition rules keep changing — verify the current position at gov.uk before large contributions. Run your own extraction modelling on the calculator with the pension slider set.
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