There are many challenges that come with starting and running your own company, and if successful, it will grow and evolve over the years. However, to avoid potential pitfalls and minimise their impact, small businesses can benefit greatly from taking time to consider these simple, yet important financial planning tips:-
• Insure your key employees
• Protect the ownership of your business
• Let the company fund your pension
• Save money on life insurance
• Maximising your tax allowances
• Keep employees happy
1. Insuring your key employees
Small businesses are particularly vulnerable should a vital employee become critically ill or die. It’s worth identifying those individuals who are essential to the success of your firm, and if you think their loss would have a significant financial impact or related risks such as losing clients, contract failure, loss of new business, or recruitment, training and temporary staffing costs, then it may be worth looking at Key Person Cover. This is basically a life insurance policy taken out on a key member of staff, where the business pays the premiums, and receives the financial pay-out if the insured person dies or becomes critically ill during the policy term. Key Person Cover is essentially there to protect your business by helping it continue to trade.
2. Protect the ownership of your business
Typically, following the loss of an owner or partner in a business, their stake is likely to pass directly to their family. If this was a majority shareholder, it could mean that the remaining owners lose control of some or all of the business. Ideally, the remaining owners could buy back the shares, giving the family a cash sum while ensuring they retain control of the business… but they would need funds to do this. A Share Protection policy provides a pay out to buy back these shares, and contains a legal agreement that sets out when and how these shares will be brought back and at what price. So, if you run a limited company and are one of two or more shareholders, you would be well advised to take out a shareholder protection policy…. ensuring both the continuation of your business in its present form, and that the families of those who built the business are properly taken care of.
3. Let the company fund your pensions
A pension can be the most tax-efficient way to draw cash away from your business. If you’re a low earner (particularly if you’re paying yourself just over the primary threshold for National Insurance and just under the basic rate band) it could be far more efficient for your company to make employer pension contributions to your pension – your company can contribute up to £40,000 a year (Gross) to your pension, regardless of your salary, and receive corporation tax relief. It can even make use of any previously unused allowance from the last three years, through carry forward.
4. Save money on life insurance
A Relevant Life Plan is a life insurance policy that is paid for by the business to cover salaried directors or employees. While it is the family and not the business that receives the pay-out if the insured person dies, the premiums are paid by the company, and may count as an allowable business expense that can be offset against corporation tax bills (great for the business), and do not count towards annual or lifetime pension allowances (great for the employee). In the event of a claim, the benefits, which can be up to 25 times the total annual income, are paid out tax free to the family via a relevant life trust, to mitigate inheritance tax.
5. Maximising your tax allowances
We’ve already discussed ways of reducing your corporation tax liability by offsetting insurance premiums and employee pension contributions – it’s also worth considering the following tips to minimse your taxable income:-
- Directors can take a minimum salary, the first £11,850 (£12,500 from April 2019) is income tax-free. By keeping your salary just above the threshold of qualifying for a state pension, while keeping within a minimum tax bracket, you can get the most benefit out of your salary.
- You can top up your income by paying yourself dividends (which can be paid to anyone who owns shares in a company) and can receive up to £2,000 in any tax year before paying tax. They are also exempt from National Insurance contributions, and are discretionary, which means they can be tailored to your individual income and tax needs.
- Don’t forget you can earn £5,000 savings interest without paying tax if you’re on a low income, and no tax on the next £1,000 of savings interest, assuming you pay no, or basic rate tax
- Take advantage of your Capital Gains Tax allowance if you are selling assets or shares from your business of £11,700 (£12,000 from April 2019)
So technically, you could earn income from a variety of sources of up to £30,000 without paying tax, through efficient use of your tax allowances…but this is a complex business and we would always recommend taking advice from your accountant.
Tax treatment varies according to individual circumstances and is subject to change. Tax planning is not regulated by the FCA
6. Keep employees happy
In our experience, firms that have a spectrum of quality group benefits in place tend to have a higher percentage of happy, long serving employees. Group benefits, where the firm pays the premiums, can encompass some or all of the following:-
• Pension schemes
• Critical illness insurance cover
• Death in service insurance cover
• Private medical insurance
• Income protection
Like most business owners, you will be focussed on the day-to-day challenges of running your business, and won’t necessarily have the time or manpower to focus on these issues. Old Bray Financial specialise in dealing with small businesses, providing advice on these and a range of financial matters, from business protection, to investments, pensions and tax planning.