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The benefits of long-term financial planning - is a company right for you?

As a business owner, the intricacies of owning and running a business with a company structure are complex, but if arranged correctly, can significantly enhance the stability of your and your family’s future. 

Using a company as a structure for your business is not for everyone. It is a major commitment in terms of compliance with company law and strict filing deadlines, with penalties applying if these are overlooked.

However, if navigated correctly, the use of a company can provide tax planning opportunities, limited liability protection and enhance the professional image of your business. Here, we explore a number of considerations to help you assess what might suit you and your situation.

Risk protection and insurance – safety in the event of hard times

Many businesses operate in uncertain markets, and with events such as Brexit and the current pandemic situation some businesses may find themselves at risk due to market conditions and through no fault of their own. Setting up a company entitles you to ‘limited liability’ to better safeguard your personal finances. If your business fails, then your liability is limited to the extent of your investment (i.e. the value of your shares in the company). 

Keyman Insurance – protects people who are vital to your business

If a key person in your business dies or becomes critically ill, the impact of losing that person from your team without immediate replacement could result in a loss in revenue or margin for your business, as well as being disastrous for their family. Key person insurance protects your business, should this happen to you. It is separate from, and additional to, the life insurance that protects the key person and their family. Premiums paid under a key person policy to compensate a company for the loss when a key person becomes critically ill or dies are tax deductible.

Remuneration planning – performance related pay, with tax efficiency to boot

How you remunerate directors and officers in a company is key to motivating them to achieve business objectives, but there are also tax considerations to take into account. Considering how to distribute bonuses, salary and dividends should be an annual exercise, supported by an appraisal process, to ensure your business remains as tax efficient as possible. 

Salary and bonuses – what to pay and how to pay it

This is not as simple a task as you’d imagine. Salaries paid out by a company will impact profits, but it can also impact a directors’ own tax position as well as the business. There can often be different approaches taken on rates of pay and calculating the level of salary or dividend. Expert advice is required to get this spot on. 

Dividends – could this expose you to a 38.1% tax rate?

Dividends are widely used by companies to distribute profits among shareholders and directors. They are not deductible from taxable profits. The tax rates for individuals on dividends are preferable to the rates on salaries. Dividends are only an option where the company has sufficient reserves. 

Pensions – it’s never too early to think about retirement planning   

Investing in a pension is certainly a valuable aspect of planning for your financial future. Income tax relief is available on pension contributions made during your working career. There are also tax reliefs available after death, ensuring that beneficiaries are looked after. The current lifetime allowance (£1,055,000) means that you need to keep your pension planning in mind throughout your working life, to avoid charges when exceeded and to make the most of your retirement and financial security in later life. 

Where you are an employee of your company, employer pension contributions offer a tax effective way of drawing funds from the company. Whereas a salary or dividend would be treated as taxable income for the recipient, the pension contributions will be made gross, such that tax relief is given at source.

Pension contributions made for employees will also be tax deductible expenditure for the company.

Selling your business – how to get your exit strategy right

There is no right or wrong way to exit your business and this will vary depending on personal and family circumstances. Regardless of your route to exiting your business, you’ll require careful planning, as there are potential pitfalls at every stage. Disposal of a company could be via a share sale, which would allow the trade to continue seamlessly. Capital gains tax on disposal is generally at 20%; however, where Entrepreneurs Relief is applicable, this could secure a lower 10% rate. Where trusts are involved, you’ll need to consider whether to keep the trust going or terminate it. All these factors will impact your financial future, so they must be carefully considered and planned for.

Estate and retirement planning – how do you secure your financial future when you’ve left the business? 

Many owners of private companies remunerate themselves from their companies with a modest salary and substantial dividends to reduce the burden of National Insurance. But as covered in the pensions section above, a pension scheme offers a very tax efficient method of remuneration, as well as providing an income when you are no longer at the reigns of your business. 

Estate planning requires a broad spectrum of considerations, including but not limited to the use of the various annual exemptions, including normal expenditure out of income, or outright gifts which may be considered Potentially Exempt Transfers (PETs). If you are passing the business to the next generation you will need to think about - who you leave it to? What tax implications might arise from your gift?  Whether Business Property Relief may apply? Should a trust be used? One benefit of a company is that it would be possible to gradually pass over control via partial gifts of your shares, with no need to sell the trade or assets.

About the authors

Paul Hogarth

+44 (0)20 7556 1480
hogarthp@buzzacott.co.uk

Richard Pott

+44 (0)20 7556 1295
pottr@buzzacott.co.uk

Using a company as a structure for your business is not for everyone. It is a major commitment in terms of compliance with company law and strict filing deadlines, with penalties applying if these are overlooked.

However, if navigated correctly, the use of a company can provide tax planning opportunities, limited liability protection and enhance the professional image of your business. Here, we explore a number of considerations to help you assess what might suit you and your situation.

Risk protection and insurance – safety in the event of hard times

Many businesses operate in uncertain markets, and with events such as Brexit and the current pandemic situation some businesses may find themselves at risk due to market conditions and through no fault of their own. Setting up a company entitles you to ‘limited liability’ to better safeguard your personal finances. If your business fails, then your liability is limited to the extent of your investment (i.e. the value of your shares in the company). 

Keyman Insurance – protects people who are vital to your business

If a key person in your business dies or becomes critically ill, the impact of losing that person from your team without immediate replacement could result in a loss in revenue or margin for your business, as well as being disastrous for their family. Key person insurance protects your business, should this happen to you. It is separate from, and additional to, the life insurance that protects the key person and their family. Premiums paid under a key person policy to compensate a company for the loss when a key person becomes critically ill or dies are tax deductible.

Remuneration planning – performance related pay, with tax efficiency to boot

How you remunerate directors and officers in a company is key to motivating them to achieve business objectives, but there are also tax considerations to take into account. Considering how to distribute bonuses, salary and dividends should be an annual exercise, supported by an appraisal process, to ensure your business remains as tax efficient as possible. 

Salary and bonuses – what to pay and how to pay it

This is not as simple a task as you’d imagine. Salaries paid out by a company will impact profits, but it can also impact a directors’ own tax position as well as the business. There can often be different approaches taken on rates of pay and calculating the level of salary or dividend. Expert advice is required to get this spot on. 

Dividends – could this expose you to a 38.1% tax rate?

Dividends are widely used by companies to distribute profits among shareholders and directors. They are not deductible from taxable profits. The tax rates for individuals on dividends are preferable to the rates on salaries. Dividends are only an option where the company has sufficient reserves. 

Pensions – it’s never too early to think about retirement planning   

Investing in a pension is certainly a valuable aspect of planning for your financial future. Income tax relief is available on pension contributions made during your working career. There are also tax reliefs available after death, ensuring that beneficiaries are looked after. The current lifetime allowance (£1,055,000) means that you need to keep your pension planning in mind throughout your working life, to avoid charges when exceeded and to make the most of your retirement and financial security in later life. 

Where you are an employee of your company, employer pension contributions offer a tax effective way of drawing funds from the company. Whereas a salary or dividend would be treated as taxable income for the recipient, the pension contributions will be made gross, such that tax relief is given at source.

Pension contributions made for employees will also be tax deductible expenditure for the company.

Selling your business – how to get your exit strategy right

There is no right or wrong way to exit your business and this will vary depending on personal and family circumstances. Regardless of your route to exiting your business, you’ll require careful planning, as there are potential pitfalls at every stage. Disposal of a company could be via a share sale, which would allow the trade to continue seamlessly. Capital gains tax on disposal is generally at 20%; however, where Entrepreneurs Relief is applicable, this could secure a lower 10% rate. Where trusts are involved, you’ll need to consider whether to keep the trust going or terminate it. All these factors will impact your financial future, so they must be carefully considered and planned for.

Estate and retirement planning – how do you secure your financial future when you’ve left the business? 

Many owners of private companies remunerate themselves from their companies with a modest salary and substantial dividends to reduce the burden of National Insurance. But as covered in the pensions section above, a pension scheme offers a very tax efficient method of remuneration, as well as providing an income when you are no longer at the reigns of your business. 

Estate planning requires a broad spectrum of considerations, including but not limited to the use of the various annual exemptions, including normal expenditure out of income, or outright gifts which may be considered Potentially Exempt Transfers (PETs). If you are passing the business to the next generation you will need to think about - who you leave it to? What tax implications might arise from your gift?  Whether Business Property Relief may apply? Should a trust be used? One benefit of a company is that it would be possible to gradually pass over control via partial gifts of your shares, with no need to sell the trade or assets.

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What to do next…

There are many things to consider before, during and after building your business. Over the next few months, each aspect will be explored in greater detail, to better guide you through the choices you will need to make for your business, your finances, and your family’s future.  

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