It’s standard practice for most businesses to use an accountant, however, the benefits of financial planning advice should not be overlooked. We look at the importance of financial planning for business owners, from pensions to protection, remuneration and personal wealth strategies.
As a business owner, you’ll want to make the most of any opportunity that will improve your company’s profitability. We regularly see missed opportunities that go beyond standard tax advice and annual allowances. As financial planners, we strive to fill the gap between accountancy services and financial advice.
Rules for using allowances
Many businesses are unaware of the carry forward rule. This allows you to carry forward and make use of annual allowances from the past 3 years. One of the main benefits of the carry forward rule is the ability for companies with varying annual profits to reinvest excess profit back into the business.
There are certain conditions to ensure eligibility:
- You need to have been a member of a UK-registered pension scheme during the past three years and the years you are wishing to carry forward.
- You have to use the unused allowance from the earliest year first.
- Your pension contributions must have used all of your annual allowance in the tax year that you wish to carry forward.
There are other conditions if you are subject to a tapered allowance. By ‘registered pension scheme’ this applies to defined contribution, defined benefit, pension credit membership or guaranteed income for life from an annuity. For more details, speak to our financial planners.
Pensions and property
It is possible to purchase commercial property through two types of pension – a SIPP (self-invested personal pension) or SSAS (small self-administered scheme). If you use a SIPP to buy commercial premises, you can usually borrow 50% of the SIPP value for the mortgage. This can be useful if you don’t have enough funds for the total purchase price.
If you choose to rent out commercial premises, the rental income isn’t subject to income tax or classed as a contribution. Therefore, business owners can continue with personal or employer contributions up to the relevant annual allowance. Also, if you decide to sell the property, there wouldn’t be any Capital Gains Tax applicable because any proceeds are added to the pension scheme value.
It’s also worth noting that some pension providers will not offer commercial property purchases unless it’s through a regulated financial planner.
Business protection and insurance
There are various forms of cover that could protect your business. We have listed a few valuable policies below:
- Shareholder protection – this type of policy pays out a lump sum if a business owner dies or suffers a critical illness. This can provide the remaining business owners with an option to purchase the deceased or critically ill business owner’s share of the business. Usually, this would be linked to a shareholder agreement that covers the legal rights to purchase such shares.
- Key person insurance – this policy covers important people in the business, for example, those who are essential to the financial success of your business. Similar to the above, a lump sum is paid out if the ‘key person’ dies or suffers a critical illness.
- Relevant life cover – as this is a tax-deductible expense, this is a term assurance policy providing a tax efficient way to protect business owners and their employees.
Strategies for remuneration
At the time of writing, the personal allowance of £12,570 and basic rate income tax threshold of £37,700 have been fixed until 2028. However, if you are a higher rate taxpayer, then your personal allowance decreases by £1 for every £2 above £100,000 of income. So, if you are earning above £125,140, then your personal allowance would be zero.
If you are drawing ad hoc dividends from your business, personal allowance thresholds can be easily missed. However, with some advance business financial planning, you can make tax-efficient plans for drawing dividends. Also, a common way for businesses to reduce their corporation tax is to employ a family member and pay them a market-value salary.
It’s worth noting that there could be changes to personal allowances in the upcoming Autumn Budget. Therefore, talk to our team if you need advice on remuneration strategies.
Personal wealth planning
A healthy business is financially resilient with a strong cash flow and an efficient approach to tax planning. However, a common scenario for many business owners is where they have a profitable company but not much personal wealth. This is usually due to having various assets and the lack of a financial plan.
At some point, the business owner(s) might want to step away or sell the business. Methods such as cash-flow planning and exit planning are essential if you want to maintain the value of your business and ensure healthy cash reserves.
Balance: Wealth Planning, Chartered Financial Planners
When it comes to financial planning, our team regularly advise business owners on tax efficient ways to make their earnings work harder. Our aim is to help you look after your personal and business wealth, so you can plan a successful exit strategy and/or retire.
Did you know that Balance: Wealth Planning has won Money Marketing’s Best Retirement Advice Firm and Next Generation Advice Firm? The latter award recognises financial advice firms with an innovative approach to financial planning through technology, modern business practices, and a client-centric approach. Speak to our team about business planning advice.
If you are a business owner and you would like to discuss any of the points mentioned in this article, get in touch to speak to our financial planning team.
Sources:
https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward
