5 Key Area of Financial Planning For Business Owners

At Juniper Wealth we work with many business owners and entrepreneurs and we have noticed some recurring questions coming up from time to time.

Here are some of the most common questions that come up:

  • How do I get my time back now the business is successful?
  • How can my business finance what I want to do with my life?
  • Is my business big enough to sell and how do I achieve the right price?
  • What’s the most tax-efficient way of taking money out of the business?
  • What are the tax implications of exiting my business?
  • How much should I be putting in my company put into my pension?
  • How can I manage the business assets to optimise tax and minimise risk?
  • How can I protect against risks that might prevent me from achieving my objectives?
  • How should I structure my remuneration between salary and dividends?
  • What happens if I fall out with my fellow shareholders or directors or one of them wants to leave the business?
  • What’s the best way of structuring my wealth outside of the business to reduce tax and maximise its potential?

As you can imagine many of these questions will be answered differently depending on your personal circumstances, individual values and your purposes in life.

This is why we take time at the start of our relationship to understand what drives and motivates you, what your values are and what your hopes and aspirations for the business are. That way, as we map out and plan for your future we can prioritise the goals that are a priority to you and help you stick to plan over the long term.

However, there are some key things that you should be considering, such as…

Start with the end in mind

Building and growing a business is a difficult task that takes dedication, passion, energy and drive. Sometimes though we get so drawn into the work of growing our business that we forget to think about our endgame with the business.

There are a few different ways to exit a business but generally they are:

  • Competitor Sale
  • Consolidator Sale
  • Asset Sale
  • Next Generation Sale
  • Management buyout
  • Employee ownership trust
  • Stock Market listing

Having an idea early on in your business journey of what kind of exit may or may not be possible for you can be vital in understanding how best to grow and develop your business. There might be certain routes that just are not suitable or do not align with your values. For example, there are consolidators in the Financial Planning sector offering eye-watering figures that I could not continence selling my business to and knowing this gives me an idea of the kind of business I will need to grow in order to facilitate the possible exit that will one day be palatable to me.

Some sectors are easier to exit in than others with well worn paths to exit whist others are more niche.

If you are trying to build a 5 year plan to exit and are unsure where to turn we would love to help you make this dream into a reality.

How do you pay yourself?

You’ll need to think about whether you draw your income as salary or dividend, or a combination of both.

Salary is deductible from company profits but attracts a national insurance levy for both the employer and employee above certain thresholds. A lot of business owners will pay themselves a small salary in order to qualify for social security benefits, including the new state pension. The minimum you can currently pay yourself in order to qualify for these benefits is £8,424. You will need 35 years of national insurance contributions to qualify for the full state pension.

There are problems with paying yourself a low salary. Personal pension contributions cannot exceed your ‘relevant’ earnings in any one year. Dividends don’t count as earnings for this purpose so most owners will instead pension contributions will be paid via an Employer contribution.

It can also be difficult to secure a mortgage. However, there are more and more lenders who are prepared to look at your overall financial situation.

Dividends are not deductible when computing profits, but they don’t carry a national insurance levy for employer or employee. Personal tax rates on dividends are lower than on salary income making them attractive. Dividends can also be shared amongst family members or your spouse (assuming they are shareholders).

The strategy you adopt should be considered in conjunction with your wider goals. Whether that’s extracting as much profit as you can now, to pay for holidays or eating out, or whether you want to build up value in the company so that you can sell and sail off into the sunset. There is no ‘one size fits all’ and careful planning is required.

What about benefits in kind?

Benefits in kind are a deductible expense for corporation tax, but there is an employer national insurance levy and you’ll pay personal tax on the cash value. This generally makes it more efficient to take dividends and pay for the benefit yourself.

As with all things tax, it isn’t quite that straightforward. Certain benefits such as company cars or loans attract special tax rules so it’s important to take advice on what’s most tax efficient for you before making any decisions.

Keeping it in the family 

It can be beneficial to employ a family member or spouse in the business if they have little or no other income. They could receive a small salary incurring little or no tax liability. The salary would be deductible, and they could build up a national insurance record and qualify for a state pension in the future.

Any salary paid must be justifiable commercially so its important to talk to an adviser beforehand.

You could also consider making a family member or spouse a Director. This would allow dividends to be paid, and a lower rate of income tax paid.

Protect yourself

There are various types of protection you might consider for yourself, your employees and the legacy of the business.

Shareholder protection is a form of life cover that provides the business with a cash lump sum if one of the owners dies or suffers a severe illness. This can minimise disruption to the business by providing cash to buy out the deceased shareholders shares, meaning control of the business stays with the remaining shareholders.

Key person cover is a form of life cover that protects the company against the loss of an important staff member. This is someone who is crucial to the financial success of the company. This can help by providing cash to make up for any loss in revenue or profits.

Relevant life cover is a tax-efficient alternative to a “death in service” benefit for directors, high earners and key employees. It allows the company to pay an employees family a cash lump sum if they were to die while employed by your company.

Consider employer pension contributions?

Your salary strategy above may limit the amount of personal pension contributions you can make, however, the company can make pension contributions into a registered pension on your behalf.

Contributions are limited to £40,000 a year, this reduces for those earning over £240,000.

These contributions are usually tax deductible and there is no national insurance levy or personal tax liability. As such employer contributions can be a very tax efficient way of extracting profits.

There are loads of other rules around pensions and taxation which we won’t cover here but it’s important that you seek advice before making any decisions and worth bearing in mind that money held in pensions can’t be accessed before 55.