Why Dividends Limit What You Can Put Into a SIPP
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But this model creates a problem that catches a lot of directors off guard when they try to make a large personal pension contribution.
HMRC caps tax relief on personal contributions at 100% of relevant UK earnings, and dividends don’t count. So a director on a £12,570 salary with £60,000 in dividends can’t claim relief on £72,570 going into a SIPP. The ceiling sits at £12,570 gross, and that’s the end of it. Drop the salary to zero and the annual limit falls to just £3,600 gross. That mismatch between total income and what HMRC actually treats as “earnings” for pension relief is the bit most directors don’t see coming, and it costs them thousands in lost tax efficiency every year.
The Earnings Rule That Trips Directors Up
The restriction comes from the tax relief rules, not the pension rules themselves. HMRC will only grant relief on personal contributions up to 100% of “relevant UK earnings” for the tax year. That covers salary, bonuses, trading profits and certain other earned income, but dividends, rental income, savings interest and investment returns are all excluded. A director drawing £12,570 in salary hits the wall right there, regardless of how much dividend income sits on top.
This doesn’t mean the pension itself has a £12,570 cap, though. For 2026/27, the annual allowance stands at £60,000, and that covers contributions from all sources combined. The bottleneck is specifically about who makes the contribution and how relief gets applied. Once that distinction clicks, the fix is actually very easy, and most directors can get it sorted within a single tax year.
Employer Contributions as the Route Around It
Instead of the director putting money in personally, the company can pay directly into the director’s SIPP as an employer contribution. These payments aren’t tied to the director’s personal earnings at all. They’re capped only by the £60,000 annual allowance, which covers everything going into the pension from every source. And if the director hasn’t used their allowance from the previous three tax years, that unused amount can be carried forward, which means very large one-off contributions become possible.
Employer contributions are deductible against corporation tax as long as they pass HMRC’s “wholly and exclusively” test. They also don’t attract National Insurance on either side, which is a significant saving in itself. That advantage has become sharper since dividend tax rose on 6 April 2026, with the basic rate now at 10.75% and the higher rate at 35.75%.
Putting pension money through the company instead of through personal income will often save more than the accountancy fee it takes to set everything up. The best SIPP providers vary considerably on how they handle employer contributions, particularly on fees for larger pots funded in annual lumps instead of monthly direct debits. For a director making one large company contribution a year, a flat-fee platform will often work out cheaper than a percentage-based one, and the gap will widen as the pot grows.
One thing to watch for directors of larger firms: if adjusted income exceeds £260,000, the annual allowance starts to taper down and can fall as low as £10,000, which will seriously limit what the company can put in.
What This Means for Your Next Tax Year
There’s no need to ditch the salary-plus-dividends model. The pension contribution route just needs to match the way the money actually flows through the company. For most owner-managers, that will mean switching from personal contributions to employer contributions and making sure the company accounts for the payment properly. The tax saving adds up fast, especially now that dividend tax rates have climbed for the second time in four years.
If you haven’t reviewed how your pension gets funded since the April 2026 changes, now is a good time. Your accountant can confirm the carry-forward position, and the company can make the contribution before the current tax year ends. Once that structure is in place, it pretty much runs itself.
