We work with a lot of business owners and entrepreneurs and guess what? Many of them have the same questions and concerns.
These are the types of questions we often get asked.
- How can my business finance what I want to do with the rest of my life?
- What are the tax implications of selling or passing it on to next generation? How can I minimise the liability?
- What’s the best way of structuring my wealth outside of the business to maximise my position?
- How can I optimise corporate and personal pension opportunities?
- What’s the most tax efficient way of taking money out of the business?
- 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?
- Do I have the right legal agreements with fellow directors and/or shareholders to protect my interests and the businesses interests?
The best approach to answering almost all of these questions is to speak to you as an individual. That way we can work together to understand what a fulfilled life looks like for you and your family. We can help to map out your future, prioritise your goals and give you a financial plan to stick to.
However, there are some fundamental issues that you should be considering, such as…
How do you pay yourself?
Consider whether to take a salary or dividend, or a combination of both.
Salary is deductible when computing company profits but attracts a national insurance levy for both the employer and employee. 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, including the State Pension is £6,240, although you may want to set it higher depending on your own tax circumstances. You 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.
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.
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 it’s 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.
Are you making employer pension contributions?
Your salary strategy as described 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 with total income 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 and this is increasing to age 57 in 2028.
Do you take benefits in kind?
Benefits in kind are a deductible expense for corporation tax, but there is 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.
Have you considered protection?
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 insurance 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 insurance 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 employee’s family a cash lump sum if they were to die while employed by your company.
This communication is for general information only and is not intended to be individual advice, so Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information. The investments described are not suitable for everyone. It represents our understanding of law and HM Revenue & Customs practice as at DATE 2021. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future.. Tax and estate planning advice are not regulated by the Financial Conduct Authority.
