UK · Contracting10 min read21 June 2026

Outside IR35? Why Your Company Should Pay Into Your SIPP Directly (Not Via Salary Sacrifice)

Standard pension calculators are built for employees using salary sacrifice. For outside IR35 contractors, the correct mechanism is a direct employer SIPP contribution from the limited company — bypassing Corporation Tax, Employer NI, and Employee NI entirely. Here is how it works, what the annual allowance rules mean in practice, and why the wealth multiplier vs the dividend route typically sits between 1.5x and 1.8x.

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Enter your company profit and see the three-path comparison for any contribution amount

If you are working outside IR35 through a limited company and you have not yet set up an employer pension contribution, you are almost certainly paying more tax than you need to. The pension route available to you is not the one most financial websites describe. Standard pension calculators are built around salary sacrifice, a mechanism designed for employees. For outside IR35 contractors, the correct mechanism is a direct employer contribution from your limited company, and it works fundamentally differently.

This guide explains how the direct SIPP contribution route works, why it outperforms both the dividend and salary routes by a significant margin, what you need to know about annual allowance limits and carry forward, how it interacts with the £100,000 personal allowance trap, and what it actually looks like to make your first contribution.

Why salary sacrifice is the wrong framework for outside IR35 contractors

Salary sacrifice works by reducing an employee's gross salary. The employer pays less PAYE and the employee saves National Insurance on the sacrificed amount. It is the standard model for workplace pension auto-enrolment. Every consumer-facing pension calculator you will find is built around this mechanism.

For outside IR35 contractors, this model is almost entirely irrelevant. Your structure is different: you take a small optimal salary (typically £12,570, equal to the personal allowance) to avoid income tax and employee NI, then extract remaining profit as dividends. You have already optimised the salary to its most tax-efficient level. There is nothing left to sacrifice from salary.

The mechanism available to you is a direct employer contribution from your limited company bank account to your SIPP. The company pays the money directly into the pension as a business expense, recorded in the company accounts. This reduces the company's taxable profit before Corporation Tax is calculated. No NI is incurred at any level. The full amount arrives in the pension without any tax leakage.

The three paths for £20,000 of company revenue

Path A: Dividend

Corp Tax (19%): −£3,800Dividend Tax (33.75%): −£5,465£10,735 net cash

Path B: Salary

Employer NI (15%): −£2,609Income Tax + Employee NI: −£7,188£10,203 net cash

Path C: SIPP

Corp Tax: £0NI (all): £0£20,000 in pension

Example: £20,000 of company pre-tax profit at 19% CT rate, higher rate income/dividend tax. The SIPP route puts 72% more to work than the dividend route.

How the direct employer SIPP contribution works in practice

The mechanics are simple. Your limited company transfers money from its bank account directly to your SIPP provider, referencing you as the member. You record this as an "employer pension contribution" in your company accounts, a deductible business expense.

The company's taxable profit for the year is reduced by the contribution amount before Corporation Tax is calculated. At the small profits rate (19% on profits up to £50,000), contributing £20,000 saves £3,800 in Corporation Tax. At the main rate (25%, on profits over £250,000), the saving is £5,000. There is no income tax or NI at any level: no Employer NI, no Employee NI, no personal income tax.

For the contribution to be deductible, it must pass HMRC's "wholly and exclusively for the purposes of the trade" test. For a working director, pension contributions proportionate to your role and market-rate remuneration are well within accepted limits. HMRC's Business Income Manual (BIM46035) confirms that employer contributions to a director's pension are allowable where they are commercially reasonable relative to the director's role and the company's size.

Annual allowance, carry forward, and high earner taper

The £60,000 annual allowance

Total pension contributions from all sources (employer contributions, personal contributions, and third parties) cannot exceed £60,000 in a single tax year without triggering an annual allowance charge. This applies across all pension schemes you hold. The allowance is your total, not a per-scheme or per-source limit.

Carry forward: the contractor's year-end tool

If you were a member of a registered pension scheme in the previous three tax years but did not use your full annual allowance, you can carry the unused amounts forward. With three years of unused allowance at £60,000 each plus the current year, you could potentially contribute up to £240,000 in a single tax year. This makes carry forward a powerful year-end planning tool; many contractors use it to clear a large slug of accumulated company profits in a single tax-efficient move shortly before their company's financial year end.

To use carry forward, you must have been a registered pension scheme member in the years from which you are carrying. Being a member with a zero balance counts; you do not need to have been actively contributing.

High earner taper: who it affects

If your "adjusted income" (all income including employer pension contributions) exceeds £260,000, your annual allowance is tapered at a rate of £1 reduction per £2 of excess. The minimum floor is £10,000, reached at adjusted income of £360,000. For most outside IR35 contractors at typical day rates, this threshold is not in play. But for very high day-rate contractors or those with significant investment income, it is worth modelling before making a large contribution.

The £100k personal allowance trap, and how the SIPP fixes it

High-impact for contractors with dividends pushing personal income toward £100k

If your total personal income (salary plus dividends) approaches or exceeds £100,000, you enter one of the UK's harshest tax bands. For every £2 of income above £100,000, you lose £1 of personal allowance. The effective marginal tax rate on income between £100,000 and £125,140 is 60%, making this band more expensive than any other in the UK tax system.

Here is the key point: employer pension contributions from your limited company do not count as your personal income. They are a company expense, not a personal receipt. They do not appear on your self-assessment and do not increase your adjusted net income. This means they have no effect on the £100,000 threshold; redirecting company profits to the SIPP removes money from the company's taxable base without increasing your personal tax exposure.

For contractors whose dividend drawings are beginning to nudge personal income toward £100,000, the SIPP is the most powerful lever available. Taking less in dividends and directing the equivalent amount as an employer SIPP contribution reduces both the company's Corporation Tax bill and keeps personal income below the personal allowance taper threshold, a double efficiency unavailable through any other mechanism.

Read: The UK 60% Tax Trap: what you take home above £100k

What does £20,000/year in the SIPP actually grow into?

Projected fund value assuming £20,000/year employer contribution, compounding annually (gross of charges).

Timeframe	5% annual growth	7% annual growth	9% annual growth
After 10 years	£251,558	£283,211	£319,122
After 15 years	£428,304	£506,839	£602,516
After 20 years	£661,319	£819,909	£1,024,532

Illustrative projections only. Real returns vary and are not guaranteed. Charges will reduce the actual return. Assumes contributions made at start of each year. Compare: £20,000/year taken as dividends at the higher rate leaves ~£11,600/year net, less than half the pension route on a before-growth basis, and with no tax-free compounding inside the wrapper.

Understanding the wealth multiplier

The wealth multiplier compares the pension value from a direct SIPP contribution to the net cash you would receive from the dividend route for the same company revenue. For a higher-rate contractor with company profits in the small profits rate band (19% CT), the typical wealth multiplier sits between 1.6x and 1.8x.

Concretely: £20,000 of company revenue becomes roughly £11,500 net cash if taken as a dividend (after 19% CT and 33.75% higher-rate dividend tax). The same £20,000 goes in full to the SIPP. The pension is worth 1.74x the dividend cash. When compounded over a contractor career of 10–20 years, this ratio has an enormous effect on total wealth accumulated.

One important nuance: the pension is not immediately liquid. You cannot access it until age 57 (rising from 55 in 2028), and withdrawals beyond the tax-free lump sum are taxed as income. For most contractors, this is a feature rather than a bug: the illiquidity provides a disciplined savings vehicle while providing significant tax efficiency during the accumulation phase.

How to make your first employer SIPP contribution: 4 steps

Open a SIPP if you don't have one

Popular low-cost options for contractors include Vanguard, AJ Bell, and interactive investor. When applying, select 'employer contributions' as part of your intended use; most providers support this without additional forms.

Tell your SIPP provider to expect an employer contribution

Contact the provider and confirm the payment reference to use when the contribution comes from your company account. Most providers have a specific reference format for employer contributions so the money is correctly attributed to your account.

Transfer from your company bank account

Send the money directly from your limited company current account to the SIPP provider's bank details using the reference they gave you. No payroll processing is needed. The transfer is a direct bank payment, the same as any other supplier payment.

Record it in your company accounts

In your accounting software (Xero, FreeAgent, QuickBooks, etc.), record the payment as 'employer pension contributions' (a staff cost or direct expense). This reduces your company's taxable profit for the year. Tell your accountant so it is included correctly in your CT600.

Key points for outside IR35 contractors

1The direct employer SIPP contribution is the correct mechanism for outside IR35 contractors, not salary sacrifice.
2The contribution is deducted before Corporation Tax, so the company saves 19–25% CT on the contribution amount.
3No Employer NI, Employee NI, or personal income tax applies to employer SIPP contributions.
4The annual allowance is £60,000 per year. Unused allowances from the past 3 years can be carried forward.
5Employer contributions do not count as personal income; they cannot push you into the £100k personal allowance trap.
6For most contractors, the SIPP wealth multiplier vs dividend route sits between 1.5x and 1.8x.
7Consider making contributions near your company year-end to maximise the tax year's allowance efficiently.

What if my IR35 status changes?

The 2023 IR35 small company threshold shift has opened outside IR35 status to more contractors. If your client company qualifies as "small" (two of: under £10.2m turnover, under £5.1m net assets, fewer than 50 staff), the determination responsibility falls back to you, not the client. See the IR35 small company threshold guide for the exact criteria. Outside IR35 status unlocks the direct SIPP contribution route.

Frequently asked questions

Can my limited company make a SIPP contribution without running payroll?

Yes. Employer pension contributions are a separate transaction to payroll. Your limited company can transfer money directly from its business bank account to your SIPP provider without the payment going through payroll, PAYE, or National Insurance. The payment is recorded in your company accounts as an employer pension contribution, a deductible business expense. You do not need to process it as salary. This is the core reason the mechanism is so efficient: it bypasses the payroll system entirely.

Does a direct SIPP contribution from my limited company fix the £100k salary personal allowance trap?

Yes, it can. If your total personal income (salary plus dividends) is approaching or over £100,000, you start losing your personal allowance at a rate of £1 for every £2 of income above £100,000. The effective marginal tax rate in this band is 60%. However, employer pension contributions made directly from your limited company do not count as personal income; they are not paid via PAYE and do not appear on your self-assessment. They reduce the company's taxable profit but do not inflate your adjusted net income. This makes them an effective tool for contractors whose personal drawings are approaching the £100,000 threshold.

What SIPP providers work well for limited company contractors?

The most popular providers among limited company contractors include Vanguard (very low cost, index fund focus), AJ Bell Dodl and AJ Bell Youinvest (broader investment range), Hargreaves Lansdown, and interactive investor. All of these accept employer contributions from a limited company. You need to tell the provider in advance that contributions will come from your company (as employer) rather than from your personal account. The provider will give you the correct payment reference to use. There is no additional paperwork beyond what you would normally complete to open a SIPP.

What if my company makes a SIPP contribution and I later close the company?

Once money is in your SIPP, it is entirely separate from the company. Closing or dissolving your limited company has no effect on the pension fund. The SIPP belongs to you as an individual. You can continue contributing personally if you move into employment or a new contracting structure. If you enter MVL (Members' Voluntary Liquidation) to extract remaining company cash efficiently, SIPP contributions made before liquidation are an allowable pre-liquidation deduction and reduce the taxable reserves available, often making a final large SIPP contribution before MVL a standard part of wind-down planning.

Can I contribute to a SIPP and also take dividends in the same tax year?

Yes. These are independent. Your limited company can make employer pension contributions at any point in its financial year, and you can draw dividends separately from the company's retained profits. The pension contribution reduces the company's taxable profit (and therefore the Corporation Tax bill). Dividends are paid from post-tax profits. Both can happen in the same year without any conflict. Many contractors combine both: keeping some retained profit to pay as dividends to fund living costs, while directing the tax-efficient portion into the SIPP.

Is there a minimum period I must have been contracting before making a SIPP contribution?

No minimum contracting period applies. Your limited company can make an employer SIPP contribution from its first year of trading, provided you are a registered pension scheme member and the contribution is commercially reasonable. However, to use carry forward (the ability to use unused annual allowances from prior years) you must have been a registered pension scheme member in the years you are carrying from. Being a scheme member with a zero balance counts, so setting up a SIPP early in your contracting career, even if you do not contribute immediately, preserves your carry forward entitlement.