You are limited each year to total pension contributions of the lower
of £40,000 or 100% of your income; in this context, income excludes
rental income, investment income and dividend income. If you are
self-employed with profits above £40,000, or employed with a salary
above this figure, then you can make the maximum contributions.
However, if you are the owner and director of your own company,
then your company can make direct payments into your pension,
irrespective of your personal salary level. If you are contributing to a
workplace pension, these payments form part of your £40,000 annual
The £40,000 “per year” means per personal tax year – e.g. 6 April
2023 to5 April 2024, 6 April 2024 to 5 April 2025. If you are going
through the employer contribution route (see below) and your
company year is not aligned with these dates, it is possible to have
two amounts of £40,000 going out of your company within the same
company year. As an example, if your company year runs 1 July 2022
to 30 June 2023, you could make one payment before 5 April 2023
and the other after.
These two types of contributions, personal and employer, have
different tax implications.
Personal contributions: these are made out of after-tax income and
are not treated as a deduction from taxable profits if you are self-
employed. HMRC refund the equivalent of basic rate tax into your
pension. Assume you have a profit of £10,000 on which you pay basic
rate tax of £2,000. You then invest £8,000 into your pension and
HMRC top this up by £2,000, so the whole £10,000 is now in your
pension. The key point here is you do not feel like you are getting any
tax relief, even though you are.
Employer contributions: the employer pays £10,000 into your pension
plan and gets a deduction for the contribution against profits. You end
up with £10,000 in your pension.
If you are unable to make the maximum level of contribution in any
year, you can carry forward the excess to be utilised in any of the
three successive years. However, to be able to utilise this, you have to
make the maximum contribution for the current year, before using the
previously unused amount.