Financial Planning Ideas That Every Business Owner Should Be Thinking About
As we emerge from what has been a very difficult last 21 months, 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. The pandemic did bring to the fore the Importance of ensuring that your own affairs are in order. It’s also important to make the most of your own personal financial planning opportunities, we are all too busy sometimes to take time out to look at our own personal financial affairs.
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 independent financial advice relevant to your own individual circumstances – our wealth management experts can assist with this.
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 draw down your pension pot in retirement – this means if you carry on earning in retirement and if you 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 be a payout 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). It may also be worthwhile bringing together any pension pots built up in the past. Many of us have pensions from various employers and roles over many years, if you bring these together into one place, it is much easier to plan for the future. It is very important to make sure that any pension plans have up to date nomination forms in place. The nomination forms dictate to whom any death benefits are paid. Pension plans sit outside of the estate for Inheritance tax (IHT) purposes and are dealt with by the pension trustees (usually the pension company) – if the nomination forms are in place, the trustees will pay out on the production of the death certificate without having to wait for the Grant of Probate to be issued – this can get cash to your nominated beneficiaries quickly at a very difficult time for the family. Our Raffingers Wealth Management consultants are specialists in pensions advice so if you want to talk to them about any pension issues 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 having 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! And if you do have life assurance policies in place, please make sure they are written in trust as this keeps any life assurance proceeds out of the estate for IHT purposes. 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-around that we would quite like our children to drive around in. In the current tax year (2021-22) if you can find an electric car with a range of 130+ miles, the BIK charge is only 1% of the list price. Even with an electric range of 40-69 miles, the BIK charge is only 7%. 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 is important to take individual advice as the numbers need to be crunched for each option but it’s certainly worth exploring.
Capital Allowances – Super deduction!
The government introduced an investment incentive by giving additional tax relief on investment in qualifying plants and machinery. For expenditure between the 1st of April 2021 and 31st March 2023, there is an additional relief of 30% over and above the usual 100% annual investment allowance. This means that for qualifying investment in plant and machinery, the tax relief on the cost to the company is effectively 24.7% as opposed to the normal 19% – in other words, a £10,000 investment, after-tax relief only costs £7,530
Research & Development Tax Credits
As a firm, we specialise in R&D claims for clients and have saved hundreds of thousands of pounds over the past few years for our clients. Qualifying R&D expenditure is not just about men in white coats in a lab but can cover a whole range of things. It’s always worth a chat with our R&D specialists to see if there is any chance you could take advantage of this. The enhanced R&D tax credits effectively provide an additional 130% of tax relief for qualifying expenditure, so well worth thinking carefully about!
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. It's 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 you 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, although with the increase in Corporation Tax rates on the horizon along with the increase in the dividend tax rate due to the new “social care levy”, the benefit is reducing. It’s also important therefore 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 it's 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. The company receives tax relief on the rent payments as an expense, and there is no national insurance due on rental income.
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 – think instead about diverting any such bonus into your pension and effectively get 60% tax relief on the pension contribution.