Pension Planning as Part of a Business Exit Strategy

For most business owners, the sale of their company is the single largest wealth creation event of their lives. Unlike employees, who build retirement savings incrementally through regular pension contributions, business owners often arrive at exit with relatively modest pension pots — the business itself was the "pension" — and a sudden influx of capital that needs to be invested for the long term.

Getting pension planning right in the lead-up to a business sale, and in the years immediately after, is one of the highest-value financial planning exercises available. The combination of corporation tax relief on pre-sale contributions, Business Asset Disposal Relief (BADR) on the sale proceeds, and careful post-exit structuring can meaningfully reduce the effective tax rate on the exit event and improve long-term retirement income.

The Pension Opportunity Before the Sale

Making Pre-Sale Employer Contributions

In the years before a sale, the company can make employer pension contributions on the owner-director's behalf. These are deductible as business expenses for corporation tax, provided they are wholly and exclusively for the purposes of the trade and represent commercially justifiable remuneration.

At the 25% corporation tax rate (for companies with profits above £250,000), a £100,000 pension contribution costs the company only £75,000 after tax relief. The contribution enters the pension free of income tax and NI. Contrast this with extracting the same £100,000 as salary: the employer pays secondary NI at 15% (£15,000, the rate from 6 April 2025) and the director pays income tax at 45% and employee NI at 2% on the salary — an effective tax rate well above 50%.

Using Carry Forward

If the owner-director has unused annual allowance from the previous three tax years, a single large employer contribution in the year of sale can be very substantial. At £60,000 annual allowance per year (from 2023/24), three years of unused carry forward plus the current year's allowance allows up to £240,000 of pension contributions in a single tax year.

For a director who has contributed only £5,000 per year for three years, available carry forward is approximately £165,000 (£55,000 + £55,000 + £55,000), giving total capacity of £60,000 + £165,000 = £225,000 in the current year.

A company making a £225,000 pension contribution for its director-owner saves £56,250 in corporation tax. The £225,000 is locked in the pension, but for a business owner selling up and planning retirement, this is precisely where wealth should be — accessible in drawdown, growing tax-free.

Timing the Contribution Relative to the Sale

For a company sale to take effect, the buyer will typically require due diligence. Large employer pension contributions made shortly before a sale are legitimate but should be clearly documented as normal remuneration planning, not an attempt to extract value from the company prior to completion. Contributions made in the tax years before the sale year (using prior-year payroll and accounts) are less likely to raise questions.

Completion accounts and a share purchase agreement typically include provisions about material changes to the business between exchange and completion. Large pension contributions made in this window may require buyer consent. Seek legal and financial advice on timing.

Business Asset Disposal Relief and Pensions

Business Asset Disposal Relief (BADR — formerly Entrepreneurs' Relief) provides a reduced CGT rate on qualifying disposals of business assets, subject to a lifetime limit of £1 million of gains. The BADR rate has risen in stages: it was 10% until 5 April 2025, 14% from 6 April 2025, and 18% from 6 April 2026. For disposals in 2026/27 the BADR rate is therefore 18%. This remains below the standard higher CGT rate on business assets (24%), though the gap has narrowed considerably following these increases.

The pension and BADR interact in an important way: the sale proceeds that benefit from BADR are the net sale price after allowable deductions. Pension contributions made before the sale reduce the company's distributable profits — but they do not reduce the CGT base cost calculation for BADR. Pre-sale pension contributions effectively transfer value from the company's balance sheet into the pension without affecting the BADR claim on the shares.

However, the post-BADR net proceeds (after BADR-rate CGT — 18% in 2026/27) still need to be invested. This is where the pension's role in post-exit planning becomes important.

Post-Exit Pension Contributions: The Personal Limit

After the sale, the former business owner no longer has a company making employer contributions on their behalf. Post-exit pension contributions are personal contributions, subject to the 100% of UK earnings rule. If the individual has little or no earned income after the sale (having retired), they can contribute only up to £2,880 net per year (topped up to £3,600 by basic-rate tax relief) as a non-earner.

If the individual takes on part-time consulting work, self-employment income, or a director role in another company post-exit, their earnings capacity for pension contributions increases. For a business owner who wants to continue funding the pension after the sale, maintaining some UK earned income — even at modest levels — extends the contribution window.

Structuring Post-Exit Wealth: Pension + ISA + Offshore Bond

Most business owners exiting at, say, age 55–65 cannot immediately access their entire pension (minimum pension access age is 55, rising to 57 in 2028). Sale proceeds sitting outside the pension need to be invested efficiently. A typical post-exit wealth structure combines:

Pension. Pre-sale employer contributions have been maximised. The pension grows tax-free and will be drawn down in retirement at the individual's marginal rate. The pension also provides death benefits, which — until the April 2027 IHT reforms — sit outside the estate.

ISA. The £20,000 annual ISA allowance should be used each year post-exit. ISA income is tax-free — no income tax on dividends or interest, no CGT on gains. For a couple, this is £40,000 per year of tax-efficient investment capacity.

Offshore bond. A significant portion of liquid post-sale assets may be placed into an offshore investment bond — providing gross roll-up, 5% annual tax-deferred withdrawal, and top-slicing relief on eventual gains. This can supplement pension and ISA income in early retirement without triggering large immediate income tax charges.

Direct investments. Rental property, direct equities, or a business reinvestment may complement the above wrappers. Each has its own tax treatment and should be positioned within the overall plan.

The Interaction Between BADR, the Annual Allowance, and the Tapered Allowance

Business owners with high income in the sale year — including the sale proceeds flowing through a dividend, a substantial salary in a good trading year, or a completion bonus — may find themselves subject to the tapered annual allowance in the year of sale.

The tapered annual allowance is triggered when adjusted income exceeds £260,000. For an owner taking a large salary, bonus, or dividend in the sale year, adjusted income could easily exceed this threshold. If so, the annual allowance may be reduced to as little as £10,000 — drastically limiting the pension contribution that can be made in the sale year itself.

This is a strong argument for making the maximum pension contribution in the tax year before the sale completes — when income may be more controlled — rather than waiting until completion.

Key Dates and Planning Triggers

• Two to three years before sale: Begin modelling carry forward. Increase employer contributions to level out any unused allowance. Discuss with a financial adviser whether a SSAS would be appropriate.
• One to two years before sale: Maximise employer contributions, utilising carry forward. Ensure expression of wishes on the pension reflects current family circumstances.
• Year of sale: Coordinate pension contributions with completion date. Model tapered annual allowance impact. Consider sale completion date relative to the tax year end.
• Post-sale: Establish ISA contributions for both partners. Consider offshore bond structure for post-sale liquidity. Model pension drawdown timing.

This guide provides general information only. Tax rules — including BADR qualification conditions, annual allowance limits, and pension contribution rules — change frequently. The amounts and planning strategies outlined are illustrative and depend on individual circumstances. Seek regulated financial advice and specialist tax advice from a qualified accountant before an exit event. Past tax treatment cannot be relied upon to continue.

How Global Investments Can Help

Global Investments works with business owners at all stages of the exit journey — from pre-sale pension maximisation to post-exit structuring of sale proceeds, pension drawdown planning, and long-term wealth management. Our advisers coordinate pension, tax, and investment strategy to help clients transition from business wealth to personal financial independence.

If you are planning a business sale in the near to medium term and want to understand how pension planning can improve your overall tax position, contact our advisory team to arrange a consultation.