The importance of regular pension contributions for business owners

If you are a business owner, your income may not have always been as straightforward as someone who earned a salary from day one of their career.

Indeed, you may have made personal financial sacrifices in your company’s first few years of operation, simply because the needs of the business came before your own. But now that your business is established, it is important to pay better attention to your long-term personal finance goals.

One aspect of your long-term financial plan is your retirement – and for most people, paying into a pension is a cornerstone of retirement planning. Yet many business owners neglect their pensions because they’re relying on a different pot of money to fund their retirement.

Continue reading to learn why so many business owners do not make the most of their pension, plus two additional reasons to make regular pension contributions as a company leader.

Many business owners rely on the eventual sale of their business for their retirement income

Business owners who plan to sell their company when they retire often make one potentially harmful mistake: they rely entirely on a sale to fund their retirement.

Research published by Forbes in 2019 found that in 2013, 12 million US business owners approaching retirement began readying their businesses for a sale.

However, five years later, only 25% of these businesses had sold for their asking price – and this left three-quarters of business owners with less wealth than they expected as they entered retirement.

Ask yourself: “After tax, could the money I earn from selling my business help me pay for my lifestyle for the coming decades, fund later-life care, and leave an inheritance for my children?”

Even if the asking price of your business could cover these costs comfortably, there is no guarantee that your business’s value, or its sale prospects, may not change in the near future.

Indeed, there are several reasons why treating your business as a “pension replacement” could be an unwise move from a personal finance perspective:

• Finding an appropriate and willing buyer can take far longer than you anticipate.
• Your business may not sell for the amount you expect, leaving you with a shortfall in retirement.
• You could pay an unexpected amount of tax on both the sale of the business and the windfall you receive from it.
• The timeline over which you plan to sell your business may be affected by factors outside of your control.

Simply put, treating your business like a pension pot could be a risky move.

Making pension contributions could ensure that business owners have a reliable retirement income

As a business owner, one savvy financial move you may wish to consider is to treat yourself as an employee. You may do this already by paying yourself a salary, but it’s important to go one step further and make monthly pension contributions too.

By paying into a pension over the long term, any capital you earn from selling your business can act as a supplement to your retirement income. This may be a more beneficial option than solely relying on your company for your future financial security.

Plus, beyond supporting your retirement income, there are several additional benefits to paying into a pension as a business owner. Let’s take a look at two of these in detail.

Two additional reasons to make pension contributions as a business owner

1. Income Tax efficiency

Paying into a pension each month could mean you pay less Income Tax on your salary.

When you route a portion of your income into your pension, your take-home pay will decrease, leaving less of your earnings vulnerable to Income Tax.

This can be extremely helpful for business owners. For example, if you are on the cusp of entering a higher tax bracket, you could increase your pension contributions to maintain a lower tax burden and funnel tax-efficient funds into your pension.

What’s more, your contributions are likely to benefit from Government tax relief at the basic rate, giving your pension an even bigger boost. Remember, if you are a higher- or additional-rate taxpayer, you can claim tax relief at your marginal rate through self-assessment each year.

2. Tax breaks for your business

As you may already know, if you have a team of employees, pension contributions are likely to be tax-efficient for your business as well as your personal earnings.

So, as well as making personal pension contributions, you can pay into your pension as an employer too.

Employer pension contributions are considered an “allowable expense” by HMRC, meaning that anything you pay towards an employee’s pot (which includes your own workplace pension) is usually deducted from your Corporation Tax bill.

You could also be liable to pay fewer employer National Insurance contributions (NICs) by increasing employer pension payments.

Both of the above points mean that you could use your pension as a doubly tax-efficient vehicle to help you save money across your business and personal finances.

If you are considering giving yourself a pay rise, doing this within your pension could mean you cut your Corporation Tax, National Insurance, and Income Tax liabilities – all whilst increasing how much you’re actually earning.

Get in touch

Here at PenLife, we help business owners, their families, and their employees take care of their personal finances.

To speak to a Financial Planner, email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.

All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.