Maximising Wealth: Dividends vs. Pension Contributions Over 10 Years

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When running a solo-band business, deciding how to handle profits is crucial for long-term financial health. Do you extract or do you pop it in a pension?

Let’s explore a scenario where an individual, who earns profits of £118,500 annually, chooses between taking all profits out as dividends or contributing to a pension. We’ll compare the outcomes over a 10-year period.

Scenario 1: Extracting All Profits as Dividends

In this scenario, our individual extracts all profits as dividends. The business generates £118,500 in profits annually, and after taxes, the individual takes home £80,048.69 each year. Over 10 years, this approach results in a total net income of:


Tax Implications:

  • The individual pays tax on dividends according to the current UK dividend tax rates.
  • Assuming the income and tax rates remain constant over the 10 years.

Scenario 2: Dividends Plus Pension Contributions

Here, the individual decides to extract a portion of the profits while contributing £60,000 annually to a pension. After the pension contribution, the net income extracted each year is £50,832.44. Over 10 years, this results in:


Pension Growth:

  • An annual pension contribution of £60,000 is made.
  • The pension grows at an assumed average rate of return (let’s use a moderate 5% for this example).

Without going into an annuity formula this means that over 10 years at an annual return of 5% contributing £60,000 each year, the pension contributions grow to approximately £754,673.55. REMEMBER: This is just an example, rates change, and you should seek independent financial advice. This is only a calculation to illustrate the differences from a tax perspective and not financial advice.

Comparison of the Two Approaches

Total Wealth After 10 Years:

  1. Extracting All Profits as Dividends:
    • Net Income: £800,486.90
    • No additional pension growth.
  2. Dividends Plus Pension Contributions:
    • Net Income: £508,324.40
    • Pension Value: £754,673.55
    • Combined Wealth: £508,324.40 + £754,673.55 = £1,263,000.95

Benefits and Considerations:

  • Scenario 1 (Dividends Only):
    • Provides higher immediate income.
    • Offers flexibility with liquid cash.
    • No long-term savings growth beyond the net income.
  • Scenario 2 (Dividends + Pension):
    • Reduces immediate disposable income but ensures significant pension growth.
    • Tax-efficient, as pension contributions are often tax-deductible.
    • Creates a substantial retirement fund, securing long-term financial stability.
    • Combined wealth is significantly higher due to the power of compound interest on the pension contributions.


When comparing the two approaches, contributing to a pension while extracting a lower net income leads to significantly greater total wealth over 10 years. The growth from regular pension contributions, compounded annually, results in a larger financial cushion for the future. While taking all profits as dividends offers higher immediate income, the long-term benefits of pension contributions are substantial, ensuring both tax efficiency and robust retirement savings.

Individuals should consider their current financial needs, tax implications, and long-term goals when deciding how to manage business profits. Consulting with a financial advisor can provide personalised guidance tailored to specific circumstances and financial objectives.

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