For those owners who can tear themselves away from their daily small business tasks, director at Drewberry financial advisers, Tom Conner, offers Business Advice readers his top five financial planning tips.
Most small business owners are too busy working for their business to spend time working on their business. Here are five financial planning tips for small company owners.
(1) Protect your legacy with shareholder protection insurance
There are almost 5.5m SMEs in the UK, but because so few owners take the time to consider how best to protect their business – there’s around a £600bn shortfall between the value of these assets and what they’re insured for.
The problem is that if the founder or another shareholding director of a small company dies, it naturally creates uncertainty as to its finances, its future ownership and, often, its ongoing existence.
Worst still, without some measure of succession planning, the families of those business owners who are unfortunate enough to die on the job can find themselves with no way to access the value that was previously locked up in the family business.
Shareholder protection arrangements alleviate both these risks. They ensure both the continuation of your business in its current form, and that the families of those who built the business (yours included) are properly taken care of.
Shareholder protection provides both the funds and the mechanism for a smooth, tax-efficient transfer of a director’s shares in the event of their death or ill health. It can be a complex area, so it’s well worth talking through with a business protection adviser.
(2) Safeguard your company’s most precious assets with “keyman” cover
The other big threat that too many small company owners ignore at their peril is the risk of losing key members of staff to long-term illness or death.
Naturally, companies with less than ten people are especially vulnerable to such losses, while a lack of “keyman” cover can often deter new investors or lenders.
By contrast, a good package of keyman insurance can be used to protect investor capital or to cover company borrowing. It can also indemnify a business against related risks, such as losing clients, contract failure, loss of new business, recruitment and training costs, temporary staffing costs and even the startup costs for a new business.
But finding the right level of cover, for the right people, can be more art than science. This makes finding an experienced adviser, who can guide you through the process and provide financial planning tips, a must.
Advisors can add worthwhile commercial value to the contributions made by different staff members, find the best combination of premiums and policy terms, and process the applications for the insurers involved.
(3) Save a fortune with a pension funded by your company
Don’t mistake your business for your pension, especially as a pension is often the most tax-efficient way to draw cash from your business.
If possible, don’t restrict yourself to making an ‘employee’ contribution from your post-tax income as your annual allowance could be limited to the taxable salary you draw.
This isn’t much use for the army of small business owners who pay themselves just over the ‘primary threshold’ for national insurance of £8,164 a year.
It’s often far more efficient for your company to make employer pension contributions.
Your company can usually contribute up to £40,000 a year (gross) to your pension and receive corporation tax relief – regardless of your actual salary – and even make use of any previously unused allowance from the last three years through what’s called ‘carry forward’ (subject to meeting the ‘wholly and exclusively’ tax rules).
(4) Focus on the relevant, save a bundle on life insurance
Relevant life insurance allows you to take out valuable life cover via your limited company for a fraction of the price it would cost on an individual basis
Because the premiums are paid by your company, it’s far more tax efficient and so far, cheaper.
As the premiums are being paid by your business rather than from your after-tax income, the cost of the premiums works out to be at least 30 per cent less for a basic-rate taxpayer and more than 50 per cent less for a higher-rate taxpayer.
The premiums paid by your business usually qualify for corporation tax relief. And, because relevant life policies don’t count as a P11D benefit, there’s no additional income tax or national insurance contributions required at the end of the tax year.
In the event of a claim, the benefits – which can be up to 15 times the total annual income you drew from your business – are also paid out to your loved ones tax-free via a specialist relevant life trust.
You can use this calculator to work out how much you could save by taking out relevant life insurance rather than personal life cover.
(5) Make your business cash holdings work harder for you
It makes sense for your business to build up a decent cash buffer in case of emergencies. But, most small business owners are missing a trick here.
By keeping their cash in standard business accounts that pay “peppercorn” rates of interest their money is losing value in ‘real’ terms due to inflation.
By contrast, there’s nothing to prevent you from putting any excess cash not needed for day-to-day cash flow or planned internal investment to work for you.
In this instance, one option that might make more sense is to look at short duration bond funds. These are offered by numerous UK fund managers and generally manage long-term returns that exceed inflation while still usually offering access at short notice.
This might mean establishing a corporate investment account, which offers access to a broad range of professionally managed funds.
In terms of financial planning tips, this could be just what your business needs if it plans to hold large amounts of cash in long-term.
Tom Conner is director at Drewberry Wealth Management. From offices in London and Brighton, Drewberry provide financial advice to clients across the UK on personal insurance, business protection, employee benefits, pensions and investments.
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