Why the pension decision belongs months before the tax year ends

Nasir RasheedNexus Tax & Accounting · Milton Keynes · MAAT AATQB
Get started

Pensions

Why the pension decision belongs months before the tax year ends

Most limited company directors work out what they can pay into a pension in the final weeks of the tax year, and by then the useful options have narrowed. This is for owner-directors who want the number in front of them while there is still time to act on it.

Published 22 October 2026

6 min read

Nasir Rasheed, Director at Nexus Tax & Accounting

Ask a room of owner-directors what their maximum pension contribution 2026/27 actually is and most will give you a number that is far too low. They are thinking of the direct debit leaving their personal account, not the allowance sitting in front of the company.

The annual allowance for 2026/27 is £60,000, according to HMRC’s published pension scheme rates. Unused allowance from the previous three tax years can be added to it. And a company contribution is not limited by the salary the director takes, which is exactly where the low-salary, high-dividend structure quietly works against people.

Our position is simple. This is a planning decision with a profit figure, a payroll figure and three years of history behind it. Left until March, it becomes guesswork. Taken in a review with time left on the clock, it becomes a decision.

Portrait of the firm owner at his desk with a white card reading Do you know how much you can pay into your pension this year?
Most directors guess, and most guesses are far too low.

Do you know your own number?

It is one of the more revealing questions to put to a director. Almost nobody has the figure to hand, and the guesses tend to land somewhere around what they are already paying. If you pay in £500 a month, your instinct says the ceiling is somewhere near £6,000, because that is the only number in view.

The real ceiling for most established limited companies is nowhere near that. The gap between what a director assumes and what the rules actually permit is usually the single largest unused planning position in the business, and it is invisible because nothing on a bank statement or a set of accounts points at it.

Portrait of the firm owner with a white card reading Profit sat in your company all year doing nothing for you
You paid corporation tax on money you never needed to take.

Profit that sat still all year

Here is what that gap costs. Profit stays in the company, corporation tax is paid on it, and what is left becomes retained earnings waiting for a dividend decision that may never come in a tax-efficient form. The money is yours in principle and doing very little for you in practice.

A company pension contribution is one of the few routes that moves money from the company into your own long-term position without going through salary or dividends. It is an allowable business expense where it passes HMRC’s test that the payment is for the purposes of the trade. None of that is exotic. It is simply a route that goes unused when nobody puts it on the agenda.

Portrait of the firm owner with a white card reading The maximum pension contribution for 2026 to 27 is sixty thousand
That is the annual allowance, and it is only the start.

The allowance, and what sits behind it

For the 2026/27 tax year, which runs from 6 April 2026 to 5 April 2027, the annual allowance is £60,000. That figure covers everything going into your pensions in the year: your own contributions, anything the company pays, and any employer scheme you are enrolled in.

Two things narrow it. If your threshold income is over £200,000 and your adjusted income is over £260,000 for 2026/27, the allowance tapers down, to a floor of £10,000. And if you have already flexibly accessed a defined contribution pot, the money purchase annual allowance of £10,000 for 2026/27 applies instead. For most owner-directors we work with, neither bites. The £60,000 is the starting point, not the ceiling.

A pension contribution decided in the last fortnight of the tax year is a number picked under pressure. The same decision taken in a planning review has profit, history and payroll behind it.
Portrait of the firm owner with a white card reading Most directors pay in from their own bank account each month
They set up a small direct debit years ago and forgot it.

The arrangement most directors are running

In practice, the typical set-up looks like this. A personal pension was opened years ago, often before the company existed or in the first year of trading. A modest direct debit leaves the director’s own current account each month. Nothing has been reviewed since.

It is an entirely reasonable arrangement for someone drawing a normal salary. It is the wrong arrangement for a director paying themselves a small salary and taking the rest as dividends, which is the structure most of our consultant and contractor clients run. The payment route was chosen when the circumstances were different, and nobody revisited it when the circumstances changed.

Portrait of the firm owner with a white card reading Your own payments are capped by the salary you take
Pay yourself a low salary and your personal limit is tiny.

Why personal payments hit a low ceiling

Tax relief on your own contributions is limited to the higher of your UK taxable earnings or £3,600. Dividends are not earnings for this purpose. So if you are on a salary of £12,570 for 2026/27 and the rest of your income arrives as dividends, your personally relievable contribution tops out around that salary figure.

A company contribution works differently. It is not capped by the salary you take. It sits against the same £60,000 annual allowance and has to pass the test that it is a genuine cost of the trade, which for a working director drawing a modest salary is rarely the obstacle people expect. Same pension, same pot, a far larger limit.

Portrait of the firm owner with a white card reading A contractor on a small salary and the rest in dividends
Good profits for three years and a pension he rarely looked at.

A familiar set of circumstances

Take the pattern we see most often. An IT or engineering contractor, trading through their own limited company, salary set low and the balance drawn as dividends. Three solid years of profit behind them. A pension opened at some point in the past that they check roughly never.

Nothing here is unusual and nothing here is wrong. The structure is doing its job on income tax and National Insurance. What it is not doing is making any use of the one route that lets retained profit move into a pension without passing through the director’s personal income at all.

Portrait of the firm owner with a white card reading His company had never paid a penny into his pension
Every contribution came from him, so the company got no relief.

The company had never contributed

When we looked at the detail, the company had never paid a penny into the pension. Every contribution over several profitable years had come out of the director’s own account, after the money had already been taxed on its way to him.

Two consequences follow. The company got no deduction against its profits for any of it, because it was never a company cost. And the amount going in was quietly governed by a salary chosen for payroll reasons, which had nothing to do with what he could have afforded or what the rules allowed. He had been paying for his pension in the most restricted way available to him, for years, without knowing there was another route.

Portrait of the firm owner with a white card reading Nobody asked him about his pension in three whole years
His old firm filed the accounts and sent the bill after.

Nobody had raised it in three years

The question worth asking is why nobody caught it. His previous accountants were competent at what they did. Books came in, accounts went out, the corporation tax figure arrived with the filing and the invoice followed. At no point in three years did anyone sit down with him before a year end and ask what he wanted to do with the profit.

This is the part of the industry we are blunt about. Compliance delivered on time is not advice. If the only conversation you have with your accountant happens after the year has closed, every decision that needed deciding during the year has already been made by default.

Portrait of the firm owner with a white card reading Three years of unused allowance sitting behind him unclaimed
Carry forward only reaches back three tax years, and then it goes.

Carry forward has a short memory

The cost of that silence is measurable. HMRC allows unused annual allowance to be carried forward from the previous three tax years and added to the current year’s allowance, provided you were a member of a UK registered pension scheme in those years. For a director who has used almost none of it, that is a substantial amount of headroom sitting behind them.

The catch is that the window only reaches back three years. Each 5 April, the oldest year drops off and does not come back. Our view is that the practical work of using carry forward, checking profit, confirming scheme membership and getting the payment made and cleared, needs time, so the review has to happen well inside the tax year rather than at the end of it.

Portrait of the firm owner with a white card reading We moved the contribution from him to the company
Checked the profit, then the three past years, then the paperwork.

What we changed, in order

The fix was not complicated. We stopped the personal direct debit and moved the contribution to the company, so it became a cost of the business rather than something paid out of taxed personal income.

The order matters. First the profit, because the contribution has to be affordable and has to stand up as a genuine business cost. Then the three previous tax years, to establish what carry forward was actually available rather than assumed. Then the paperwork: board minute, correct payment from the company account, and the scheme told to treat it as an employer contribution. Each step is ordinary. Doing them in sequence, with months rather than days to spare, is the whole trick.

Portrait of the firm owner with a white card reading He now knows his pension number before the tax year ends
It sits in the same review as his dividend and tax figures.

The number arrives before the deadline

What changed for him permanently is that the pension figure now turns up at the same time as everything else. It sits in the same review as the corporation tax forecast and the dividend headroom, well before the tax year closes, because those three numbers are the same decision viewed from three angles.

You cannot sensibly decide what to pay into a pension without knowing the profit position, and you cannot sensibly plan dividends without knowing what the pension contribution will take out. Looked at together, with time to act, it is a straightforward allocation. Looked at one at a time in March, it is a scramble.

Portrait of the firm owner with a white card reading A pension decision made in March is mostly guesswork
Ask your accountant this now, and save this post for later.

March is too late to think

So the position we hold is this. A pension decision made in the last weeks of the tax year is mostly guesswork, because the profit figure is provisional, the carry forward position has not been checked properly and there is no room left to get the payment made and cleared in time.

If you are a limited company director and you do not know what your allowance is this year, that is the question to put to whoever does your accounts. Not in March. Now, while the year still has shape in it and the answer can still change what you do.

Where this leaves you

The £60,000 annual allowance for 2026/27 and the three years of carry forward behind it are published, public rules. Nothing here is clever. What makes the difference is whether someone puts your profit, your payroll and your pension history on the same page while there is still time to act on what they show.

There is nuance. The taper applies to higher earners, the money purchase annual allowance removes carry forward for money purchase contributions if you have flexibly accessed a pot, and the contribution still has to be a genuine cost of your business. Those are checks, not obstacles.

If you want your pension, corporation tax and dividend position mapped out in one go before this tax year closes, the set-up review is where we do that. Nexus takes three new clients a month.

Milton Keynes · MAAT AATQB · Three new clients a month · Set-up review for every new client