Many business owners have built real value in a company and comparatively little outside it. How you take money out is one of the biggest long-term financial decisions you will make.
- Salary, dividends and pension contributions are taxed very differently.
- Employer pension contributions can be an allowable business expense.
- Relying solely on the business as your pension concentrates risk.
- Exit planning works best started years before the exit.
Salary, dividends or pension contributions — which is most tax-efficient?
- Salary. Deductible for the company, but subject to income tax and National Insurance on both sides. Usually worth taking at least enough to preserve your State Pension record.
- Dividends. Paid from post-tax profit, taxed at lower rates than salary, with no National Insurance. Often efficient — but only available if the company is profitable.
- Employer pension contributions. Frequently the most overlooked. Generally an allowable business expense, with no National Insurance, and the money grows in a tax-advantaged environment.
Why is "the business is my pension" a risk?
"The business is my pension" is one of the most common things we hear, and one of the riskiest. It ties your income, your capital and your retirement to a single asset in a single sector — one that may be worth less than you expect when you come to sell, or take longer to sell than you planned.
Building wealth outside the company is not a lack of confidence in it. It is diversification.
What protection do business owners usually overlook?
Key person cover, shareholder protection and relevant life policies are routinely overlooked in owner-managed businesses. A shareholder agreement without funding behind it can leave families and remaining owners in a very difficult position.
How far ahead should you plan a business exit?
Planning that begins three years before a sale generally produces better outcomes than planning that begins three months before. Pension funding, the structure of the sale and how the proceeds will be invested afterwards all benefit from time.
Should your accountant and financial planner work together?
The best results here come from your accountant and financial planner working from the same picture. We are happy to work alongside yours.
Sources: dividend and income tax rates are on GOV.UK, Tax on dividends and Income Tax rates and Personal Allowances.
This article is general information, not personal advice. Tax treatment depends on individual circumstances and may change in future. The Financial Conduct Authority does not regulate tax planning. The information contained within this article was accurate at the date of publication and is subject to change. Reviewed by Bright Wealth before publication.