Instead of setting up a private pension, many small business owners see their business as their retirement fund. Technically, you can use your small business to fund your retirement - there aren’t any laws which prohibit this. If you’re able to sell your business when you want to stop working, you could then use the money as retirement income. Or to top up your State Pension payments.
While it’s possible, it’s not always the best idea to rely on your business alone to generate your retirement income. There are pros and cons, considerations and tax benefits that you may miss out on when prioritising your business over setting up a pension.
What are the risks of using your business as a pension?
There’s no reason not to use your business as a pension, but it’s important to be aware of the risks.
No one can predict what might happen with the economy - small businesses may be hit by anything from changing markets and supply chain issues to a loss of customers or even a global pandemic.
It can be hard to predict the value of your business - looking into the future, it’s not always possible to know how much your business will be worth when you retire. Which makes it more difficult to then budget for how much money you have to live off.
There are no guarantees you’ll be able to sell your business - or make a profit on it, and if this happens and you don’t have a back-up option, such as a pension, you could have a lot less to live off than you planned for.
The money from your business may not be enough - depending on the lifestyle you want, your business may not cover the living costs needed for your ideal retirement.
What are the benefits of a pension as a business owner?
Most employed workers are eligible for Auto-Enrolment. Which means they have a workplace pension set up for them which benefits from tax relief and employer contributions. But self-employed workers and small business owners can also benefit from saving into a private pension. Here’s how.
Tax relief on personal contributions - usually basic rate tax payers get a 25% tax top up from the government. For example, if you made a £100 contribution, HMRC would add £25 making it £125. Higher and additional rate taxpayers can also claim further tax relief. However, this has to be claimed through a Self-Assessment tax return.
You can pay into your pension from your limited company - if you make employer contributions from your limited company directly to your private pension, you won’t have to pay National Insurance (NI) on the contribution. The current NI rate is 15% (2025/26) - by contributing directly to your pension (rather than paying it as a salary) your company could save up to 15%.
Lower your corporation tax bill - pension contributions from a limited company are treated as an allowable business expense. This means they can be offset against your business’s Corporation Tax bill which could save your company up to 25% in Corporation Tax.
It’s worth keeping in mind that tax relief is only available on your net relevant earnings and dividends aren’t included in this. If you have a small salary but large dividends, it could be a better option to make employer contributions from your company. Watch the video below to find out more.
Is a pension a better product for Inheritance Tax planning?
Until recently, pensions were a great tool when it comes to paying less Inheritance Tax (IHT). Most pension pots could be passed to a beneficiary when a person dies without the money being subject to IHT. If you were to pass your business onto your beneficiaries, the money would usually be counted as part of your estate and therefore subject to IHT.
However, the rules around pensions and IHT are set to change from April 2027 when unused pension funds are set to be included in a person’s estate.
What are the alternatives to using a business as a pension?
How you fund your retirement will be completely down to your personal circumstances and the kind of retirement you’re hoping for.
You could choose to rely on your business for this, or use one (or more) retirement products alongside it. Having one or more other savings vehicles as well as your business can give you more options.
As well as a private pension, you could also use property, investment accounts or ISAs which are another tax-efficient way to save. The key to retirement planning is to choose products that work for you and your long-term goals.
Rebecca Goodman is an award-winning Freelance Journalist. For the past 15 years she’s been working for national newspapers and magazines including The Guardian, The Independent, The Times, The Mail on Sunday, This is Money, and MoneySavingExpert. Her work is driven by wanting to help people to make their money work harder, exposing wrongdoing in the financial services industry, de-mystifying money issues, and sharing great easy money-boosting tips.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
