Why pensions should play a bigger role in director remuneration

As dividend tax rates increase from April 2026, company pension contributions are becoming a central part of profit extraction planning for many directors – not just an optional extra.

Key pension advantages

• When used appropriately, employer pension contributions may offer a number of advantages compared with other forms of remuneration.
• Deferring taxable income
  Employer pension contributions are not subject to income tax or National Insurance when paid. Funds can potentially be accessed later at a lower marginal tax rate Under current rules up to 25% of pension benefits may be taken tax-free, subject to individual limits. tax-free.

Corporation tax efficiency

Employer pension contributions are generally deductible for corporation tax purposes, provided they are made wholly and exclusively for the purpose of the business. This can reduce the company’s taxable profits while contributing towards the director’s long-term financial security

Tax-efficient growth

Investments held within a pension grow free from income tax and capital gains tax. This can allow pension savings to compound more efficiently over time compared with investments held outside a pension wrapper.

Inheritance and estate planning benefits

Under current legislation, if death occurs before age 75, pension death benefits may usually be paid to beneficiaries free of income tax. However, pension death and inheritance tax rules are subject to change and should be reviewed regularly as part of wider financial and estate planning. With careful planning – including the use of annual allowances and carry-forward relief – pensions can provide one of the most tax-efficient ways to extract profits while supporting long-term financial security.

For many directors, placing greater emphasis on pensions may now be essential rather than optional as dividend tax rates rise.

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Important information

This article is for information purposes only and does not constitute financial advice or a recommendation. Pension investments are long‑term and the value of investments can fall as well as rise, meaning you may get back less than you invest.

Tax treatment depends on individual circumstances and may change in the future. Pension rules, allowances and death benefit legislation are subject to change.

Any advice or recommendations would only be provided following a full assessment of your personal circumstances by an appropriately authorised adviser.