How to Build a Tax-Efficient Pension as an Agency Owner

When you're deep in the trenches of running your agency, retirement planning often falls to the bottom of the priority list. The immediate demands of client work, team management, and business development can easily overshadow your long-term financial security.

But here's the reality: as an agency owner, you don't have a corporate employer building your pension pot for you. You are your own pension provider. The decisions you make now will determine whether you can maintain your lifestyle when you eventually step back from your business.

I've worked with hundreds of agency owners at Sidekick, and I've seen firsthand how powerful pensions can be as a tax planning tool. Let me show you how to build a robust retirement fund while significantly reducing your current tax bill.

Why Pensions Are a Powerful Tax Planning Tool

Before diving into specific strategies, it's worth understanding why pensions are uniquely valuable for agency owners:

Corporation Tax Relief: Company pension contributions are fully tax-deductible, reducing your corporation tax bill by 25% of the contribution amount.

No National Insurance Contributions: Unlike salary, pension contributions aren't subject to NICs, saving both employer and employee contributions.

Tax-Free Growth: Your investments grow free from income tax and capital gains tax inside the pension wrapper.

Tax-Free Lump Sum: When you reach retirement age, you can take 25% of your pension as a tax-free lump sum.

Income Tax Efficiency: You can structure withdrawals to minimise income tax in retirement.

In essence, pensions offer tax advantages at every stage: when contributing, while invested, and during withdrawal.

How Much Can You Contribute? Pension Limits in 2025/26

Understanding contribution limits is essential for maximising your pension strategy:

Annual Allowance

The standard annual allowance for 2025/26 remains at £60,000. This is the maximum you can contribute while receiving tax relief, limited to 100% of your UK relevant earnings (or £3,600 if higher).

Carry Forward Rules

If you haven't used your full annual allowance in the previous three tax years, you can "carry forward" these unused allowances. This is particularly valuable for agency owners with fluctuating profits who can make larger contributions in high-income years.

For example, if you've used only £20,000 of your allowance in each of the last three years, you could potentially contribute up to £180,000 in 2025/26 (current year's £60,000 plus £120,000 carried forward).

Tapered Annual Allowance

High earners face restrictions. If your "adjusted income" exceeds £260,000, your annual allowance reduces by £1 for every £2 above this threshold, down to a minimum of £10,000.

Lifetime Allowance Changes

The traditional Lifetime Allowance has been abolished and replaced with a Lump Sum Allowance of £268,275 and a maximum tax-free lump sum of 25% of that amount. This is welcome news for successful agency owners who can now grow their pension pots without lifetime limits.

Should You Contribute as an Individual or Through Your Company?

You have two options for making pension contributions: personally or through your company. Let's compare them:

Personal Contributions

With personal contributions:

• You receive tax relief at your highest marginal rate (20%, 40%, or 45%)
• The relief is either added to your pension by the provider (basic rate) or claimed through your tax return (higher rates)
• Contributions are limited by your earned income

Company Contributions

With company contributions:

• Contributions are a legitimate business expense, reducing corporation tax by 25%
• No income tax or NICs are payable (unlike salary)
• Contributions aren't restricted by your personal earnings, only the annual allowance
• They provide greater flexibility for profit extraction

For most agency owners, company contributions are significantly more tax-efficient. Let me demonstrate with a simple example:

Scenario: Extracting £50,000 from your agency

Option 1: Dividend

• Corporation tax on profits: £12,500 (25% rate)
• Dividend tax (assuming higher rate): £12,656 (33.75% on amount above dividend allowance)
• Total tax: £25,156
• Net benefit: £24,844

Option 2: Company Pension Contribution

• Tax cost: £0 (fully deductible for corporation tax)
• Net benefit: Full £50,000 goes into your pension

The difference is striking. The pension route provides an additional £25,156 toward your future, simply through tax efficiency.

What Pension Schemes Should Agency Owners Use?

Several pension structures are well-suited to agency owners:

Self-Invested Personal Pension (SIPP)

A SIPP offers maximum control over investment choices, allowing you to select from a wide range of assets including funds, shares, bonds, and commercial property. This flexibility makes SIPPs popular with agency owners who want active involvement in investment decisions.

Small Self-Administered Scheme (SSAS)

A SSAS is a specialised pension for business owners that provides unique capabilities:

• Ability to lend back to your business (up to 50% of fund value)
• Purchase of commercial property for business use
• Multiple members (ideal for agencies with multiple directors)

These features make SSAS arrangements particularly valuable for using pension funds to support your agency's growth.

Workplace Pension

If you employ staff, you'll need a workplace pension to meet auto-enrollment requirements. You can participate in this scheme yourself, though it typically offers less flexibility than a SIPP or SSAS.

Standard Personal Pension

These offer simplicity with limited investment choices but may have lower fees than SIPPs. They're suitable if you prefer a more hands-off approach to pension management.

Tax-Free Pension Perks for Agency Owners

Beyond standard contributions, several specialised pension strategies can provide additional tax benefits:

Pension Salary Sacrifice

If you take a salary from your agency, consider implementing a salary sacrifice arrangement. This involves formally exchanging part of your salary for an equivalent pension contribution, saving both personal and employer NICs.

For example, sacrificing £10,000 of salary for pension contributions could save approximately £1,180 in combined NICs, on top of income tax savings.

Family Pension Planning

If family members work legitimately in your business, consider making pension contributions for them too. This spreads the tax advantage across multiple individuals and builds family wealth in a tax-efficient manner.

For non-earning spouses or children, you can still contribute up to £3,600 gross (£2,880 net) per year with tax relief, regardless of their earnings.

Property Purchase via Pension

Your pension can purchase commercial property, including your agency's office. This creates multiple tax advantages:

• Rent paid by your company to the pension is tax-deductible
• No capital gains tax on property value growth within the pension
• Rental income within the pension is tax-free
• Protection of a valuable asset from business creditors

This strategy works particularly well with SIPPs and SSAS arrangements.

When and How to Withdraw Your Pension Tax-Efficiently

Effective withdrawal planning is just as important as contribution strategy:

Access Age

You can access your pension from age 55 (rising to 57 in 2028). At this point, you have several options:

Tax-Free Lump Sum: Take up to 25% of your pension value tax-free, up to the Lump Sum Allowance (currently set at £268,275).

Flexi-Access Drawdown: Leave the remainder invested and draw income as needed. This income is taxed at your marginal rate when withdrawn.

Annuity Purchase: Exchange some or all of your pension for a guaranteed income for life.

Tax-Efficient Withdrawal Strategy

To minimise tax in retirement:

• Draw only what you need each year to stay in lower tax bands
• Consider spreading the 25% tax-free cash over multiple years instead of taking it all upfront
• Combine pension income with other sources (dividends from your agency if you still own it, ISA withdrawals, etc.)
• Potentially phase retirement, reducing agency work gradually while drawing a smaller pension

Common Pension Mistakes to Avoid

Prioritising Dividends Over Pension Contributions

Taking dividends when you could make pension contributions often results in significantly higher tax. Always consider pension contributions before declaring dividends, especially if you're approaching retirement.

Ignoring Carry Forward Allowances

Many agency owners don't realise they can make much larger contributions by utilising unused allowances from previous years. This is particularly valuable in high-profit years or when preparing for an agency sale.

Missing the Annual Allowance Reduction Threshold

High-earning agency owners often trigger the tapered annual allowance unexpectedly. Careful planning around the £260,000 threshold can preserve your full contribution allowance.

Forgetting to Consider Pensions in Exit Planning

When selling your agency, a significant pension contribution before sale can substantially reduce your tax liability. Integrating pension planning into your exit strategy is essential for maximising post-sale wealth.

Failure to Review Investment Strategy

Many agency owners set up pensions but neglect to review the investment strategy. Regular reviews ensure your pension aligns with your changing risk tolerance and retirement timeline.

Creating Your Financial Freedom

A well-structured pension strategy is one of the most powerful financial planning tools available to agency owners. It transforms what would otherwise be tax payments into your future financial security.

For a typical successful agency generating £300,000 in profits, implementing an optimal pension strategy can redirect £50,000-£100,000 from tax to retirement savings annually. Over a 10-20 year period, this creates a multi-million pound difference in retirement wealth.

At Sidekick, we help agency owners build personalised pension strategies that balance current business needs with long-term financial security. Our approach considers your unique circumstances, growth plans, and exit strategy to create a comprehensive plan.

Ready to transform your retirement outlook while substantially reducing your current tax bill? Book a conversation with our specialist agency accountants today. We'll help you build a pension strategy that works as hard as you do.