If you’re a business owner, you’ll probably agree that things haven’t been easy over the past year. The Covid-19 pandemic has affected even the most well-organised and robust organisations.  

I do think that there’s now light at the end of the tunnel, and hopefully we can start looking forward to things slowly returning to normal. 

Because of this, I believe that now is an ideal time to review your financial situation and start looking at your financial priorities in the coming months. 

Your business is the engine of all your other finances, so its success is essential to your future. However, it is important not to overlook your personal financial situation and make sure that you don’t neglect your family’s finances. 

I’ve always seen my role as a financial planner as organising my client’s entire finances – both personal and business – so they can achieve their long-term goals.

So, here are some ideas where, working in tandem with you, I can help you to get the most from both your business and personal finances.

Boost the value of your pension and reduce your tax bill

As a business owner there are several ways you can simultaneously boost the value of your pension and reduce your tax bill.

Make employer pension contributions

Like many business owners, you might be taking a small salary from your company, which limits the employee contributions you can make to your pension. 

The maximum you can pay into your pension and benefit from tax relief is £40,000 (gross) or 100% of your earnings, whichever is less. This is known as your “Annual Allowance”. 

However, the salary limit does not apply to employer contributions, which can obviously give you more scope to maximise your pension contributions.

It can also be more tax-efficient to make contributions as an employer:

•  Your business will receive Corporation Tax relief and effectively save 19% on your contributions. So, a £500 contribution from your company costs £405.  
• Employers don’t have to pay National Insurance on pension contributions. With the Class A rate of 13.8%, this means a total saving of 32.8% on contributions made into your pension rather than paid as salary.

Use your spouse’s allowance

Every individual has the same pension Annual Allowance. So, if you have a spouse or partner, your combined Annual Allowance could double to £80,000. 

Many businesses are a family team effort, so you can increase the value of your combined pension pot by making employer contributions into your spouse’s pension as well as into your own.

Ensure your family decide what happens to your business, not the taxman

When planning your finances there are simple steps you can take to protect your business so that your family get to decide what happens to it, rather than HMRC.

Make a will

The most basic legacy planning tool is a will. This lets you specify how you want your personal and business assets distributed when you die and who will be responsible for disbursing those assets.

Even if you already have a will in place, it’s worth checking that you’re still happy with the contents and updating it, as necessary.

Business Relief

Business Relief reduces the amount of Inheritance Tax (IHT) payable on the transfer of qualifying business assets. For some assets, the reduction is 100%, which means the asset is effectively exempt from IHT.

You can get 100% Business Relief on a business, an interest in a business and shares in an unlisted company.

Business Asset Disposal Relief (formerly Entrepreneur’s Relief)

You might also qualify for Business Asset Disposal Relief. This reduces the amount of Capital Gains Tax you must pay when you sell all or part of your business.

If you qualify, you will pay tax at 10% on all gains on qualifying assets. You can claim a total of £1 million in Business Asset Disposal Relief over your lifetime.

Think about how you own your business property

Purchasing your business property through your pension is another way of maximising your pension arrangements for the benefit of both your business and personal family finances. 

Self-invested personal pensions (SIPPs) allow a much wider range of investments than standard personal pensions, and this includes commercial property. 

There are three key tax-related advantages to purchasing your business premises through a SIPP: 

• You will pay rent to the scheme, which is not subject to Income Tax
• No Capital Gains Tax is payable if you sell the property in the future
• As the property now sits within your pension arrangements, it won’t be taken into account when your estate is assessed for IHT.

However, buying commercial property through a SIPP can be complex, and I would always recommend you seek financial advice before proceeding.

Make the right investment choices

How you invest both your pension and other savings is important. Making the right investment decisions can make a big difference to the size of fund you build up. 

I normally recommend that my clients review their investment holdings regularly to check they are still on track and match their investment outlook. 

Too much tampering with your investments isn’t good, however, as you should be looking to the long term, as far as possible. I suggest annual reviews, with maybe an ad hoc assessment if circumstances change.

Take your income tax-efficiently

Structuring how you extract money from the company can greatly increase your tax efficiency. 

Paying yourself a monthly salary is the easiest way to take an income and support your day-to-day financial management. In the 2020/21 tax year the Personal Allowance is £12,500, so there is no reason not to pay yourself this amount, and also pay the same amount to your spouse or partner if applicable.

In addition, paying yourself through dividends can be beneficial, assuming there’s enough business profit to cover them.

The advantages of doing this are:

• Salary paid as dividends is exempt from National Insurance 
• The first £2,000 of dividends you take are tax free
• Basic-rate taxpayers only pay 7.5% tax on dividends taken. The rates for higher and additional rate taxpayers are 32.5% and 38.1%, respectively.

Invest any surplus capital

With interest rates on savings at an all-time low, you might want to review how you’re managing any surplus capital in your business. 

One option could be to invest some of the surplus in stock markets or other investment vehicles that can potentially offer a higher rate of return than the average savings account.  

Obviously, this will depend very much on your plans. Such investment should usually be considered for the long term – at least five years – so you should look to keep some accessible capital in low-risk holdings for emergencies and so that it’s protected from any sudden market downturn. 

Always plan ahead 

As well as considering ways of maximising tax and financial efficiency through your business, I’d also strongly recommend that you always have an eye on the future and plan ahead. 

I use sophisticated financial planning tools with my business owner clients that clearly show what impact your financial choices will have on your future wellbeing – both business and personal.

Cashflow modelling can also help you manage and future-proof your finances by showing the impact of certain events – both internal, such as buying a new business premises, and external, such as a period of high inflation or reduced profits. 

This will help you to make informed financial decisions, giving you the best chance of boosting your future financial health.

Get in touch

To find out more about how I can help you with your business and personal finances, please get in touch. 

Email graeme@macfp.co.uk or call 01349 832849.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.  

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.