When a construction company’s year‑end accounts show £600,000 sitting in the bank, it’s tempting to divert a chunk straight into the directors’ pensions. After all, large pension contributions slash corporation tax and secure long‑term wealth—surely a win‑win?
Not so fast.
Year‑end accounts are only a snapshot. They freeze one moment in time and tell you nothing about the cash demands that will hit in the weeks and months ahead. In London’s fast‑moving construction sector—where multiple projects, subcontractors and HMRC deadlines collide—cash‑flow timing is everything.
We have teamed up with Darren Carter of Carter Financial Planning. Darren having once owned a construction business himself, brings a wealth of experience to pension and wealth planning for construction companies.
The hidden liabilities we uncovered
| Short‑term obligation | Amount due |
|---|---|
| PAYE & CIS payroll | £192,000 |
| Outstanding supplier invoices | £168,000 |
| VAT and corporation tax | £146,000 |
| Total short‑term liabilities | £506,000 |
True working capital left after payments: ~£60,000.
For a contractor juggling several live sites across the M25, £60k is uncomfortably thin. One delayed client payment or unexpected material hike could wipe it out overnight.
The pension dilemma explained
A £200k pension top‑up looked attractive on paper:
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20% corporation‑tax saving
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Immediate boost to directors’ retirement pots
But it would also drop available cash to ‑£140,000, leaving the company unable to meet debts as they fall due—a breach of the Companies Act and a direct path to sleepless nights.
Key takeaway:
❌ Don’t let a headline bank balance drive investment decisions.
✅ Do build a forward‑looking cash‑flow model first.
Step‑by‑step fix for London construction firms
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12‑week cash‑flow forecast – Map every expected inflow (applications for payment, retentions, variations) and every outflow (materials, labour, VAT, CIS, corporation tax).
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Scenario‑test growth plans – Layer in pipeline projects and likely start dates. What happens if a client is 30 days late paying?
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Ring‑fence working‑capital buffer – For most London contractors, 8–10% of annual turnover is a solid minimum.
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Schedule staged pension contributions – Spread payments over the financial year, timed to fall after high‑cash periods (e.g., post‑interim certificate receipts).
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Review quarterly – Update forecasts as projects complete and new ones start. Construction cash flow is never static.
The result for our client
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Pension targets still achieved within the tax year
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Adequate cash left for payroll, CIS and suppliers
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Peace of mind that HMRC won’t issue late‑payment penalties
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Clear roadmap to fund future growth without risking insolvency
Why this matters for London construction business owners
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Urban overheads are higher. Site access fees, congestion charges and London‐weighting on wages all squeeze liquidity.
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Project timelines shift constantly. Delayed planning approval in Southwark or a surprise TfL utility diversion in Islington can stall payments for weeks.
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Labour scarcity spikes costs. Subcontractor day rates rise fast when HS2 or a Canary Wharf tower ramps up hiring.
Managing these variables demands more than a glance at year‑end cash. It requires a living, rolling forecast that reflects the real‑world volatility of construction in London.
Ready to turn cash‑flow chaos into confident growth?
Our Virtual Finance Office (VFO) and Virtual Finance Director (VFD) services specialise in construction finance. We translate complex numbers into clear, actionable plans, so you can:
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Maximise tax‑efficient pension contributions
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Maintain positive cash headroom on every project
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Grow without nasty surprises from HMRC or suppliers
Book a free 30‑minute call to see how forward‑looking cash‑flow modelling can unlock both your retirement goals and your company’s long‑term stability.
