It feels like throwing money away
“It Feels Like Throwing Money Away”
I spoke to a group of young business owners last week about tax-efficient ways to take money out of their businesses. Great conversation – but when pensions came up, a couple pushed back.
*”It feels like I’m throwing money into a pot I’ll never see again.”*
I get it. When you’re building a business in your twenties or thirties, locking money away for decades feels counterintuitive. But that framing misses what a pension actually does for a business owner.
When your limited company contributes to your pension, it’s a deductible business expense. No Corporation Tax on the contribution. No National Insurance. No tax on the growth. If your company puts £40,000 into your pension, that’s up to £10,000 saved in Corp Tax alone – before you even consider the NI savings compared to taking it as salary.
Now let those numbers run and compound. If you contributed £40,000 a year for 25 years and it grew at 7%, you’d be sitting on a pot worth roughly £2.5 million. And that £10,000 a year in tax savings invested at the same rate, compounds to over £630,000 on its own. That’s the tax you didn’t hand to HMRC, working for you instead.
*”But I can’t touch it for decades.”*
True – not until 57 under current rules. But most business owners I meet have almost everything tied up in the business itself. That’s a concentration risk. What if the market shifts? What if your health changes? What if a buyer doesn’t appear when you need one?
A pension is simply future income you’re funding today in the most tax-efficient way available. It’s not gone. It’s yours. It’s just working somewhere other than your current account.
And as those numbers show, the earlier you start, the less it costs. Small, consistent contributions in your thirties can dramatically outperform larger amounts crammed in during your fifties – compounding does the heavy lifting.
Pensions aren’t exciting. But for a limited company director, they’re one of the few ways to move significant money out of the business with almost no tax friction. It’s not throwing money away – it’s the most tax-efficient way to pay yourself, just on a longer timeline.
—
*If you’re a business owner wondering how to balance reinvesting in the business with planning for your own future, drop me a message david@gibsonfp.com .*
