Tax relief for contributions
The amount that can be contributed to a pension and qualify for tax relief is limited. For each tax year it’s the greater of £3,600 and your UK taxable employment income or profits from business. Generally an overall cap of £60,000 applies, although it can be lower.
Anyone can pay into a pension for someone else and the recipient receives the tax relief. For example, you could pay a contribution for your spouse or unmarried partner.
Example. Adam, who owns and manages his own company, is married to Eva who currently has no taxable income. Adam can help Eva build a pension fund while she’s not working by paying contributions of up to £3,600 per year. After basic rate tax relief (20%) the cost to Adam is just £2,880. However, he has to meet this cost out of his personal income.
Company contributions
Pension contributions made by a company on behalf of a director or employee are exempt from income tax and NI, and the contributions are deductible for corporation tax purposes.
If your company contributes to your spouse’s (or other relative’s) pension, and they are not an employee/director, the exemption does not apply. The contribution is taxed as additional salary which isn’t tax efficient.
Continuing with our example, if Adam’s company makes the £3,600 contribution, assuming he is a higher rate taxpayer, the total tax and NI cost for him and his company would be between £999 and £1,253 depending on the rate of corporation tax his company pays.
Employ your spouse
A simple way to make this arrangement tax efficient is for your company to employ your spouse. This could be as a fellow director or an administrative position if a role in the trade itself is unsuitable. The overall remuneration package, including pension contributions, must be in line with other staff in comparable roles.
Employer contributions are not restricted to the level of earnings and as such your company can make a larger contribution to your spouse’s pension than you.
Shareholder not employee
Alternatively, if you transfer just a small number of ordinary shares to your spouse and the company pays the £3,600 annual contributions, it counts as a distribution, which is taxed at dividend tax rates.
If your spouse has no other income or is a basic rate taxpayer then the distribution will either be tax free or taxed at 10.75%.
Example. Adam transfers 1% of his company’s ordinary shares to his wife Eva. Eva has no taxable income and therefore the maximum that can be paid into her pension for 2026/27 is £3,600. The company makes a £3,600 payment into Eva’s pension. The company doesn’t get any corporation tax relief for the payment. As Eva has no taxable income, her personal allowance covers the payment, making it tax free.