Financial Planning Ideas That Every Business Owner Should Be Thinking About
For many owner managed businesses (OMB), things have been a real struggle through lockdown – with many falling through the cracks of the governments support schemes etc. But as things gradually open up and business improves, it’s important to make sure you are doing all you can to take advantage of what is available in terms of tax efficiency and financial planning.
Below we outline a few areas you may want to consider. Please note however that before taking any action, we would urge you to seek advice relevant to your own individual circumstances
Pensions are well and truly back on the map after the Government introduced the flexible retirement rules several years ago. You now have total flexibility on how you drawdown your pension pot in retirement – this means if you carry on earning in retirement and just need a “top up” from the pension pot you can do so. If at all possible, you want to minimise the impact of higher tax rates on pension income.
Pension pots are also exempt from Inheritance Tax (IHT) and under age 75 the death benefits are very tax effective, as the whole of the fund value can pay out to your nominated beneficiaries tax free.
So, use your company to make pension contributions for you. In most cases, your company can contribute up to £40,000 per annum into a pension pot for you. If you don’t use the full £40,000 in one year, you can carry forward any unused relief for up to 3 years.
And If you want even more control over your investments or quite like the idea of purchasing commercial premises for your company to operate from, consider making use of a Self-Invested Personal Pension Plan (SIPP). Our Raffingers Wealth Management consultants are specialist in pensions advice so if you want to talk to anybody about pensions and the various options available, let us know
Relevant Life Assurance
Many business owners could have their company pay their life assurance premiums without any taxable benefit in kind charges arising under what we call a Relevant Life policy.
Rather than have to extract money from your company to fund the premiums with the tax extraction costs that entails, why not have the company pay the premiums for you!
Again, talk to us about your life assurance needs and we can ensure it is done in the most tax efficient way.
Low emission Co cars – can the company supply a low emission car for the kids, all expenses paid!
As many of you are aware, if your company provides you with a company car, you suffer a personal income tax charge on the value of the benefit in kind. The benefit is calculated by applying a percentage rate to the list price of the car when it’s new. The percentage rate ranges from 2% to 37%. For the gas guzzlers, this can be very expensive and therefore not worthwhile having the company pay for the car for you.
But what about the low emission run-arounds that we would quite like our kids to drive around in. In the current tax year (2020-21) if you can find an electric car with a range of 130+ miles the BIK charge is only 2% of the list price Even with an electric range of 40-69 miles, the BIK charge is only 8%
We know that one of the biggest costs when the kids start to learn to drive is the insurance – if we can have the company provide them with a company car with a low BIK charge rate, the company can pay for the leasing costs and all the running costs (except the fuel), getting tax relief on the costs in the process, whilst the personal tax charge on the director will be quite low.
Again, it important to take individual advice as the numbers need to be crunched for each option but it’s certainly worth exploring.
Cycle to Work Scheme
Cycling has become a popular pursuit for many – and even more so during lockdown. So why not get your company to purchase the bike for you!
The Governments “cycle to work” scheme provides tax breaks for supplying employees (and yes directors are employees as well) with a bike.
To be a qualifying scheme, it has to be open to all employees. The bike is purchased by the company and “loaned” to the employee / director for the first year under a hire agreement. At the end of the first year, the employee can purchase the bike from the company at market value – HMRC’s guidance suggest this would be between 18 - 25% of the original cost.
So the company gets full tax relief on the purchase of the bike (and accessories and safety equipment); reclaims the VAT on the purchase; the employee gets the use of the bike for year 1 and purchases it from the company at the end of year 1 at a significant discount.
The qualifying condition for the scheme is that the bike has to be used for a qualifying purpose (cycle to work; or the station on the way to work; or to a client’s premises etc) for at least 50% of the time.
The scheme applies to directors of one-person limited companies as well as employees of large businesses.
So, if you have always fancied that bike, why not look into the cycle to work scheme. Purchases by the company up to £1,000 in value fall within the exemption that means the hire agreement is not subject to having a FCA license.
It is important to set up the scheme correctly and to have the right paperwork in place – so if it’s of interest to you, give us a call to discuss.
Structure and profit extraction
It is important to plan for future profit extraction in the early days of a business. This could mean bringing the family members in as shareholders; different classes of shares to assist with future dividend planning; bringing family members onto the payroll for work they undertake for the company.
Its also a good idea to keep the exit plan / strategy in mind. It may be more efficient to do some restructuring before a sale etc. so don’t leave such plans to the last minute – talk to us well in advance so if anything needs to be changed in terms of structure, it can be.
Dividends, in most situations, are still the better profit extraction route for the small company owners. But it’s also important to consider other options as well, including:-
- Pension investment
- Paying interest on directors loans if money has been lent to the company
- This could (in certain circumstances) provide some tax free interest to you if its covered by the annual savings allowance whilst at the same time giving the company a tax deduction in its accounts.
- Paying rent if the company is occupying business premises owned by you.
Avoid the 60% tax band!
It is also important to try and avoid the 60% marginal tax rate that we have in the UK on the band of income from £100,000 to £125,000. Due to the effect of losing your personal allowances once your income exceeds £100,000 coupled with a 40% tax rate on such income, it means that income in this band is effectively taxed at 60%. If your gross earnings are £100,000 and you receive a “bonus” of £10,000 – you will only receive £4,000 of this bonus after tax. In fact if you are an employee you lose another 2% in National Insurance – so from the £10,000 bonus you receive only £3,800 !!! Again, you need to plan ahead if you may be falling into this income band
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