Salary Sacrifice Is Changing — But Not for Business Owners: Here’s What Directors Need to Know in 2026
- Jamie Flook
- Dec 9, 2025
- 8 min read
Updated: 3 days ago
TL;DR: Quick Answer for Business Owners and Directors
The 2025 salary sacrifice changes do not affect limited company directors.
Directors don’t use salary sacrifice, they use employer pension contributions, which are unchanged.
Making pension contributions through your company remains one of the most tax-efficient ways to extract profits and save for your future.
Many business owners have recently asked whether the government’s proposed 2025 salary sacrifice changes will affect their ability to continue paying pension contributions tax-efficiently through their limited company
There’s been a lot of noise, and quite a bit of confusion.
So let’s clear it up:
If you’re a director of a limited company, the new restrictions on salary sacrifice
do not affect you.
You can still make employer pension contributions from your company.
And it remains one of the most effective ways to extract profits tax-efficiently.
This article explains:
Why the rule changes don’t apply to business owners
How employer pension contributions actually work for directors
Why pensions remain one of the most powerful financial planning tools for limited companies
What business owners should do next
What Directors Are Asking Right Now About Salary Sacrifice
These are the questions we’re hearing most frequently:
“Do the salary sacrifice changes affect me as a director?”
“Should I stop using salary sacrifice into my pension?”
“Are employer pension contributions still tax-efficient?”
“Can I still move profits into my pension from the company?”
“Is there a limit to how much my business can contribute?”
If you run a limited company, this article will give you the clarity you need.
What Has Actually Changed With Salary Sacrifice?
The government has proposed a tightening of salary sacrifice rules, specifically for employees in companies where salary-sacrifice schemes were being used aggressively to reduce the employee NIC and employer NIC bill.
The focus of the changes is on employment arrangements, not company owners.
✔ Salary sacrifice rules are changing
✘ But limited company directors are not the target
If you do not take a salary in the traditional employee sense (as most directors do not), the new rules simply do not apply to you.
Instead, you use employer pension contributions made directly from the company, which is completely unaffected by these changes.
Why Business Owners Aren’t Affected
Here’s the key distinction:
Salary sacrifice is an employee benefit arrangement. Employer pension contributions for directors are a company-level remuneration decision. They are governed by different legislation.
For owner-directors of a limited company:
You do not need salary sacrifice.
You can make employer contributions instead.
Employer contributions continue to qualify as an allowable business expense.
There is no link to your salary level.
Your pension contributions remain tax-efficient and fully legitimate.
This is why the salary sacrifice changes do not restrict director-led pension funding.
How Employer Pension Contributions Work for Directors
When your company makes a pension contribution for you, several benefits occur at once:
1. Corporation tax relief
The contribution is usually treated as an allowable business expense, reducing your corporation tax bill.
2. No income tax or National Insurance
Unlike salary or dividends, pension contributions are not taxed on the way in.
3. You extract profits without triggering personal tax
It's one of the few occasions where you win and the business wins at the same time.
4. Larger contributions are possible
Employer contributions are not restricted by your personal “relevant earnings”, unlike personal contributions.
5. You build long-term personal wealth
You move money from a trading or cash-heavy company into a personal, protected, long-term investment environment.
For most directors, this is one of the most effective profit extraction methods available.
Take a pause - and ask yourself "Am I taking advantage of this massive tax-efficient retirement planning opportunity?"
Here's what you want to avoid: looking back in 10 years and wishing you'd been smarter with how you use your profit.
Want to know how to avoid that? plan now.
But you don't know what you don't know, right?
In that case, we do know, so why not...
🚨 Take our free quiz - see how tax-efficient you are 🚨
We've designed a quiz to help you understand how tax-efficient you're being, both in the short-term and long-term.
It's not a sales quiz. There are no 'right' answers, it simply reviews how joined-up your tax planning and profit extraction are.
Try it here and get personalised results for what you should do next, plus get our free guide 'The Business Owner's Guide to Financial Independence'.
Why Pension Contributions Are Good for Both You and the Business
✔ For You (Personally)
You build a tax-advantaged long-term investment pot
Contributions are not treated as income
You avoid dividend tax, income tax and NIC
Funds grow in a sheltered environment
Pension assets are outside your estate for IHT purposes until 2027
✔ For Your Business
Reduce your corporation tax bill
Smooth out years of high profits
Deploy cash more efficiently
Less pressure for it to deliver for you, as you've diversified your wealth and risk away from the company
Employer pension contributions remain fully allowable under the current HMRC rules (2025).
In short: it’s one of the most sensible planning tools available to limited company owners.
“How much can a limited company director contribute to a pension in 2026?” (The Practical Rules)
This is where misinformation often appears online.
The key rule is the “wholly and exclusively” test.
Employer contributions must be:
Justifiable based on the director’s role
Appropriate in the context of the business
Part of a reasonable remuneration package
In practice, HMRC accepts contributions that:
Are in line with profit levels
Reflect the director’s importance to the business
Are part of a consistent remuneration strategy
There is no hard limit, but planning needs to be sensible and documented.
The Annual Allowance (£60,000 for most people) still applies, but company contributions don’t require you to have £60,000 of personal salary, because they're not linked to your income.
Carry forward of unused allowance from the previous three years may also be available, meaning you could potentially put £240,000 into a pension in one year. This is highly complex area of pension advice, so please consider taking advice if you plan to utilise Carry forward!
Example: How a Business Owner Benefits from Company Pension Contributions
Our client Nicky, runs a recruitment business. This was his position this year:
Company profit (pre-tax): £100,000
Director takes: £50,000 as salary, using up his Personal Allowance and Basic Rate Income Tax, as well as ensuring he gets a credit towards the State Pension.
As this is taken as salary, this is calculated before Corporation Tax. If it were dividends, it'd be taken after.
Nicky wants to roll over £30,000 to next year for re-investment in staff.
Thereafter, he wanted our advice on how best to save for his future outside the business. We told him he has two main options:
Option A — Take as much as you can as dividends
Nicky faces dividend tax and the company still pays corporation tax on profits.
In this scenario Nicky would have paid £23,500 Corporation Tax. As he wants to leave £30,000 in the company, he'd have been able to take £46,500 as a dividend.
This would then get taxed at 33.75%, meaning £15,693 dividend tax.
From that £100k, he'd have his £30,000 to reinvest in the business and £30,807 in dividends.
Ultimately, between the company and himself that's £39,193 paid in tax.
Or another way of looking at it, a 39.2% tax rate.
Option B — Company contributes £60,000 to pension
The employer pension contribution of £60,000 is an allowable expenses remember, bringing his taxable profits down to £40,000.
Nicky pays Corporation Tax of £9,400, leaving £30,600 in the company.
£60,000 is saved for his future in his pension.
Between himself and the company he's paid £9,400 tax.
Or a 9.4% tax rate.
In this scenario, employer pension contributions reduce Nicky’s effective tax rate from 39.2% to 9.4%
Tax Saved or Tax-deferred?
Yes, you may point out that tax is simply deferred in pension and not avoided, and you'd be right to say that.
By combining tax-free cash with basic-rate withdrawals, many directors achieve an effective withdrawal tax rate of around 15%.
So if you factor in a 15% future tax, along with your 9.4% contribution tax rate? Your quids in and nowhere near the tax rate of Option A.
This is one of the rare situations where: You keep 100% of the money and the business still benefits.
Of course... we recommended Nicky opt for Option B.
What Business Owners Should Do Next (Step-by-Step)
Step 1: Review how you currently extract profits
Salary, dividends, pension contributions, and company cash should be co-ordinated.
Step 2: Assess whether pension funding fits your long-term goals
Director pensions are not just tax tools, they support retirement and exit strategies.
Step 3: Check Annual Allowance availability
Especially carry forward availability.
Step 4: Align contributions with company profits
Make contributions that are proportionate and justifiable.
Step 5: Build a long-term remuneration strategy
This is where professional planning adds real value.
How Lab Financial Planning Helps Business Owners
As Certified and Independent Financial Planners specialising in UK limited company business owners and directors, we make sure you:
Structure tax-efficient remuneration
Use pensions strategically to reduce tax and build wealth
Plan how and when to extract profits
Move from company wealth to personal financial independence
Create joined-up long-term financial plans
We ensure pension contributions fit your:
Tax position
Business profitability
Retirement plans
Personal goals
Exit strategy
This is where good planning, not just good products like pensions, really matters.
Conclusion
The headlines around salary sacrifice have created unnecessary concern for business owners.
But the reality is simple:
👉 The changes do not affect limited company directors.
👉 Employer pension contributions remain one of the most powerful tax-efficient tools available.
These rules continue to apply in 2026 and there is currently no proposal to restrict employer pension funding for directors.
As a business owner or limited company director you need to avoid regret, that's one of the best things you can do now.
Don't look back in 10 or 20 years' time and wish you'd been more intentional about extracting profit and building your personal financial security, away from the business.
You can do one of two things now:
1) Take our free quiz to understand if you're doing the right things with your profit extraction and tax-efficiency, and if not, what you can do about it, both in the short-term and long-term.
2) Book in a call with Jamie to see if what you're doing makes sense, or whether we recommend an alternative approach.
🚨 Take our free quiz - see how tax-efficient you are 🚨
We've designed a quiz to help you understand how tax-efficient you're being, both in the short-term and long-term.
It's not a sales quiz. There are no 'right' answers, it simply reviews how joined-up your tax planning and profit extraction are.
Try it here and get personalised results for what you should do next, plus get our free guide 'The Business Owner's Guide to Financial Independence'.
Jamie is Lab Financial Planning Managing Director, and a Certified Financial Planner™. He advises business owners and makes sure that their money, life and business are aligned in working towards their goals.
If you feel like you need help with your financial planning, why not get in touch to see if we can help?
Remember, there are no stupid questions. Everyone has a different level of knowledge about money and planning their finances.
We speak in plain English to help take away the fear and empower you to use your money well.
You can drop Jamie an e-mail: jamie@labfp.co.uk
Or, you can book in a free introductory call, to discuss your situation, here: https://calendly.com/labfp/intromeeting
FAQ
Do the new salary sacrifice rules affect limited company directors?
No, directors do not rely on salary sacrifice. They use employer pension contributions, which are unaffected.
Is it still tax-efficient to contribute through my company?
Yes, employer contributions remain one of the most tax-efficient profit extraction methods.
Is there a limit to how much my company can contribute?
There’s no hard company limit, but the Annual Allowance and the “wholly and exclusively” test applies.
