Calculator
Contractor pension via Ltd calculator (2026/27)
The multiplier on extracting profit through your Ltd's employer pension contribution vs taking it as additional dividends. Models corporation tax saved at your specific marginal rate (19% / 26.5% / 25%), the alternative dividend tax, and the £60k annual allowance with £260k adjusted-income taper.
Reviewed 28 April 2026 · 2026/27 rates verified£20,000 into pension
1.76×
For each £1 of forgone net dividends, your pension pot gains £1.76. Personal cost £11,370.
Show full breakdown
Where the maths goes
| Profit before contribution | £80,000.00 |
|---|---|
| Profit after contribution | £60,000.00 |
| Corporation tax savedMarginal rate 26.5% on the contribution band | −£5,300.00 |
| Alt: post-CT amount available as dividendContribution minus the CT that would have been paid | £14,700.00 |
| Alt: dividend tax on additional dividendAt your marginal band given existing salary + dividends | −£3,330.25 |
| Alt: net to pocket if taken as dividend | £11,369.75 |
| Pension pot value (full contribution) | £20,000.00 |
| Effective personal cost (forgone net dividends) | −£11,369.75 |
How an employer pension contribution works
Your Ltd pays the pension scheme directly out of pre-tax profit. The contribution is a deductible business expense for corporation tax, reducing the company's CT bill at its marginal rate. It is NOT taxed as a benefit-in-kind on the contractor (s.307 ITEPA 2003), NOT subject to NI on either side (excluded from earnings under s.6(1) SSCBA 1992), and lands gross in the pension pot.
The alternative: take the same money as dividend
The opportunity-cost comparison: the same £1 of profit taken as additional dividend pays corporation tax first (19/26.5/25% depending on profit band), then the post-CT distributable amount pays personal dividend tax (10.75/35.75/39.35% depending on the contractor's band stack from existing salary + dividends). What lands in the bank is significantly less than the £1 of original profit.
The multiplier
The ratio of pension pot value to forgone net dividends. Typical contractor multipliers land between 1.4× (small- profits, basic-rate dividends) and 2.5× (marginal-relief band, higher-rate dividends). The headline number above shows the multiplier at your inputs; lower box shows the full company-side and personal-side breakdown.
Annual allowance + taper
All pension contributions in a tax year combined (employer + personal + made by anyone for you) count toward the same annual allowance of £60,000. Above this, the excess is taxed as income at your marginal rate, eliminating the saving on the over-the-line portion. Carry-forward of unused allowance from the prior 3 years is allowed.
Taper applies only at very high incomes: both threshold income (above £200k) AND adjusted income (above £260k) must be exceeded. The allowance reduces £1 per £2 over £260k of adjusted income, floored at £10k. Most contractors don't hit either threshold.
What this calculator doesn't cover
- Carry-forward of unused allowance.Up to 3 prior years of unused allowance can be added to the current year. The calculator only checks against the current year's £60k (or tapered amount). If you're making a lump sum above £60k, model the carry-forward room with your accountant.
- Lifetime / Lump Sum Allowance. The Lifetime Allowance was abolished April 2024. Drawing 25% as a tax-free lump sum is now capped at the Lump Sum Allowance (£268,275). Death benefits cap at the Lump Sum and Death Benefit Allowance (£1,073,100). These apply at draw time, not contribution time, not modelled here.
- Money Purchase Annual Allowance.If you've already flexibly accessed a defined-contribution pension, future DC contributions are capped at £10k/year (MPAA). Triggered for retirees re-contributing; not relevant for working-age contractors building up a pot.
- Wholly-and-exclusively determination.We assume the contribution passes the test (typical for full-time owner-managed Ltds at market day rates). Disproportionately large contributions relative to the director's actual role can be challenged by HMRC.
- Pension provider fees.SIPP / workplace scheme platform fees aren't modelled. Typical SIPP fees are £100–£300/year depending on pot size and provider.
- Future tax on draw. 25% tax-free lump sum, 75% taxed as income at your retirement-era marginal rate. Your retirement tax position depends on other income at that point, modelling that is out of scope.
Frequently asked questions
- What does the multiplier mean?
- It's the ratio of pension pot value to forgone net dividends. A 1.65× multiplier means: every £1 of personal income you give up (by extracting via pension instead of dividend) lands as £1.65 in your pension pot. The reason it's above 1× is that the pension route avoids both corporation tax (deductible) AND dividend tax (no personal-side tax on employer contributions), whereas the dividend alternative pays both. Multiplier above 2× is common for higher-rate dividend taxpayers because they lose more to dividend tax under the alternative.
- Why does the multiplier change with my profit level?
- Because the corporation tax saved depends on your profit's marginal CT rate. Profits ≤ £50,000 pay 19% small profits rate. Profits £50,001–£249,999 sit in the marginal-relief band where each £1 of profit reduction effectively saves 26.5% (the small-profits rate plus a 1.5% top-up from the marginal-relief formula). Profits ≥ £250,000 pay the 25% main rate. Higher CT rate = more saved when you contribute = bigger multiplier. The personal-side dividend rate also matters: higher-rate dividends are 35.75% so the alternative loses more to tax, pushing the multiplier higher.
- Why does my existing dividend amount matter?
- The alternative scenario stacks the new dividend on top of your existing dividends, so the marginal dividend tax depends on your current band position. If your existing salary + dividends are below £37,700 of taxable income, the alternative dividend is taxed at the basic rate (10.75% in 2026/27). If you're already in higher-rate territory (above £37,700 taxable income), the alternative is taxed at 35.75%, making the dividend route considerably worse and the pension multiplier correspondingly higher.
- What's the £60k annual allowance?
- The total of all your pension contributions in a tax year, employer + personal + any made by anyone else for you, combined. Standard allowance is £60,000 since April 2023. Going over the allowance means the excess is taxed as income at your marginal rate (the 'annual allowance charge'), which eliminates the saving on the over-the-line portion. The calculator flags excess contributions in red. To go over £60k legitimately, use carry-forward of unused allowance from the prior 3 years.
- When does the taper kick in?
- Two thresholds must BOTH be exceeded before the taper applies: threshold income (income before pension contributions) > £200,000, AND adjusted income (income + employer pension contributions) > £260,000. Once triggered, the £60k allowance is reduced by £1 for every £2 of adjusted income above £260k, floored at £10,000. Most contractors at typical day rates don't hit either threshold. At very high day rates (£1,200/day+) the taper becomes relevant and the calculator surfaces a tapered allowance figure when applicable.
- Can I really avoid all employee + employer NI?
- Yes. Employer pension contributions are explicitly excluded from earnings under s.6(1) of the Social Security Contributions and Benefits Act 1992, meaning no Class 1 NI on either side. They're also excluded from benefit-in-kind treatment under s.307 of ITEPA 2003, so no income tax on the contractor either. This NI-free status is a major reason the multiplier beats both salary-extraction and dividend-extraction routes. A £20k bonus to yourself would attract ~£3k of employer NI plus all the personal-side tax/NI; £20k as employer pension contribution attracts zero NI.
- What about the wholly-and-exclusively rule?
- The contribution must be a reasonable business expense, i.e. proportional to the work the director does for the company. HMRC's published guidance accepts contributions up to the £60k allowance for full-time owner-managed contractor Ltds at typical day rates. Above that (using carry-forward), contributions of £100k+ are accepted but warrant explicit accountant sign-off and good documentation. Disproportionate contributions (e.g. £100k from a £30k profit Ltd with minimal trading) can be challenged. For most contractors this isn't a practical concern; for very high contributions, work with your accountant to document the rationale.
- Why is this better than salary sacrifice?
- Salary sacrifice (where the contractor sacrifices part of their salary in exchange for pension) is the right mechanic for umbrella contractors and permanent employees. For Ltd contractors, the employer-contribution route is structurally simpler (no payroll involvement, no salary impact, the Ltd just makes the payment direct) and equally tax-efficient. The two are different paths for different employment structures: see /calculator/salary-sacrifice-pension if you're umbrella or PAYE. Most Ltd directors should use this calculator's mechanic because their entire 'salary' is already optimised at £12,570, sacrificing further would push them below the personal allowance, which isn't useful.
Related calculators
Salary sacrifice pension
The umbrella / PAYE alternative, different mechanic, different multiplier.
Outside IR35 (Ltd)
Day rate to net for Ltd directors, see your profit level before deciding the contribution amount.
Salary–dividend split
Optimal director-salary level, set this first, then consider pension on top.
Related guides
Reviewed: 28 April 2026 · See how we calculate · not financial advice.