Whether making strategic decisions, managing staff or building relationships with customers, running a business takes time, focus and energy. In our experience, business owners often don’t have the time to pay enough attention to their own financial planning goals. In addition, business efficiency can also be improved by sensible financial planning. Indeed, as the prospects for your business and personal financial goals are closely aligned, seeking tailored financial planning advice can assist business owners to plan ahead for the future with confidence.
At FAS, our experienced advisers can help business owners meet their financial objectives. In this article, we take a look at three common scenarios where the independent advice we have provided has proved beneficial.
Scenario 1 – Profit extraction via pensions
Business owners need to decide the most appropriate method of extracting profits from their business to fund their ongoing costs and lifestyle. Most business owners that we advise pay themselves a modest salary, and receive funds to cover their personal expenditure via dividends. But what about profits made by the business in excess of their living costs?
Profits made by a business are subject to Corporation Tax, which is charged at 25% for companies with profits over £250,000; however the rate reduces to 19% for small businesses with profits under £50,000. This tax charge can effectively be saved if the company arranges a pension contribution on behalf of the business owner, as such contributions are usually treated as a legitimate business expense and deductible from profits liable to Corporation Tax. Furthermore, there is no National Insurance liability either, which would be the case if the additional profits were drawn as salary.
Pension planning using Employer Contributions can be a very sensible and tax efficient method for the business owner to reduce their company’s Corporation Tax bill, and build up retirement savings for their future use. This is particularly powerful when business owners move closer to retirement, as funds drawn through Employer Pension Contributions could be accessed if required.
Tax legislation does, of course, change from time to time, and the new Government could bring about changes in pension legislation. We therefore recommend seeking advice before taking any action.
Scenario 2 – Protecting business interests
We often come across business owners and shareholders who don’t consider the potential impact of the death or serious illness of a business owner or key staff member. This could mean years of hard work are placed in jeopardy, and could compromise a business owners retirement plans.
Losing key personnel to death or serious ill health could have devastating consequences for the future success of the business and its’ employees. Some businesses may even face wind up or closure due to the loss of an individual who is vital to the success of the business. Key Person protection is an insurance that provides a cash benefit to the company in the event of the death, diagnosis of a terminal illness, or a specified critical illness, of a key individual in the business. The funds paid through the policy could be used to help cover any potential reduction in profits as a result of the missing individual, meet ongoing business expenses, or pay for recruitment and training costs for a replacement.
We have also seen instances where the structure of the business could potentially lead to difficulties in the event of the death of a shareholder. It is quite common for a shareholder in a small business to prepare a Will that leaves their shares in the business to their spouse or children on death. This is understandable, as the value of the shares are then left to the benefit of family members. That being said, the spouse or children may not have any interest in being a shareholder in the business and may prefer to sell the inherited shares to other shareholders. This may also be the desired outcome from the other shareholders’ perspective.
The shares will, of course, have a value and other shareholders may have difficulty raising the necessary finance to purchase the shares. This is where a Shareholder protection policy, arranged in an appropriate manner under a Trust arrangement, can provide the necessary funds to the other shareholders so that the deceased shareholder’s shares can be purchased from the estate.
Scenario 3 – Keeping business cash productive
We have come across many successful firms, who have built up substantial balances in cash. Naturally, some of these funds will be needed for day-to-day cashflow; however, funds that are truly surplus to these requirements should really be working hard for the business, and more often than not, they simply languish on a business bank account earning little, if any, interest.
The obvious first step is to look for business deposit accounts that pay more attractive rates of interest. Many banks offer such accounts, but rates of interest differ greatly. At FAS, we have assisted business owners in finding suitable deposit facilities to keep surplus funds productive.
Many business owners are unaware that businesses can make capital investments using business funds, which are held in the name of the company. Where excess funds held by a business are unlikely to be needed in the short or medium term, investing in a diversified portfolio of investments could generate superior returns over time and potentially lead to growth in the value of the business. Corporate investments are an area where specialist advice can add significant value, not only in terms of selecting an appropriate investment strategy aligned to the investment time horizon, objectives and tolerance of investment risk, but also to make sure the investment will not have any impact on the status of the company, which could lead to adverse tax consequences in the event of the sale of the business in the future.
Saving business owners time and money
As demonstrated above, there are many ways that independent advice can help business owners achieve their personal financial planning goals and help grow their business. In addition to the services described in the three scenarios above, our experienced advisers can also provide independent advice on a range of employee benefits, such as death in service and private medical group policies and help establish group pension plans. Speak to one of the team to start a conversation about the ways we can assist.
