According to figures from The Federation of Small Businesses, a UK not-for-profit organisation representing small and medium-sized companies, SMEs account for at least 99.5% of businesses in every main industry sector. In fact, they employ around 16.3 million people. Evidently, the backbone of the UK economy, but political and economic stresses have created a challenging and complex environment in which to operate. So, here are our ten top financial planning tips to ensure your business remains shipshape!
- The Tapered Annual Allowance
This reduces the amount you can shelter in a pension scheme, without suffering a tax charge, from £40,000 to as little as £10,000, depending on your income. Everything counts, salary, bonus, dividends and other investment income. The reduction of the annual allowance is triggered when income (including employer pension contributions) exceeds £150,000 pa, reducing the amount you can pay into a pension tax-efficiently by £1 for every £2 of income over this amount. Therefore, once the total income reaches £210,000, the amount you can pay into a pension, tax efficiently, is only £10,000.
First, make sure you are aware of this change. Secondly, the impact of this can be delayed if you have unused pension relief from the previous three tax years. This is called carry forward relief. So, step two is to work out how much carry forward relief you have, so you can make sure you mop that up. Carry forward is a “use it or lose it” allowance.
Of course, there will come a time when the carry forward relief is all used up. What then? Well, think about other ways to be tax efficient. Examples include using your spouse’s pension allowance (they may still have a £40,000 annual allowance and/or carry forward relief). Then there’s ISAs, £20,000 each, albeit from post-tax earnings. You could even consider ISAs for the kids or stakeholder pensions for them (£3,600 gross per child per year – you actually pay £2,880 after tax relief).
- Check the Lifetime Allowance
Assuming you don’t have a protected Lifetime Allowance, the limit is £1.055 million in 2019/20. The effects of compound growth in a pension are significant over time. Any benefits drawn that exceed the lifetime allowance will attract a 55% tax charge if withdrawn as a lump sum, or 25% if the excess funds are used for annuity purchase or placed in a drawdown pension plan. The aim of this is to neutralise the tax relief on money paid in and the tax-free growth inside the pension. The younger you are, the more of an issue this will be. It is usually unattractive paying tax relieved contributions that are just going to be paid back in retirement at 55% tax; so assuming a 5% pa growth rate, how much will your pot be worth by the time you retire? In addition, what impact will contributions have? If it’s close to £1m, you need to start thinking about alternatives to pension contributions.
Sometimes commercial property is leased, sometimes owned by the directors or the company. But a pension can be used too. Look at whether a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) is a better route.
Who is key to sales, profits or operations in your business? What would happen if they weren’t there? Keyman cover can provide a capital sum to pay for a short-term replacement or help with cash-flow.
Most people have several pensions from past employment. Chances are, they may no longer have the most competitive charges or best fund options. Also, do they let you take advantage of the full range of pension freedoms? Take a look at whether you can simplify them. Note anything with Guarantees should be protected though.
A SSAS (described above) can loan money back to the sponsoring employer. It’s a good combination of tax planning, saving for the future and helping the business.
What happens if your business partner dies or suffers a critical illness? Do you want the family involved in the business in their place or would you buy them out? Does the business have the cash-flow for that? It might, but a properly structured Shareholder or Partnership protection arrangement can provide cash at a crucial time to protect both the business and the family.
Whilst taking pension benefits in certain circumstances will reduce the amount you can save in a pension in the future, there is no reason you can’t do some financial planning. You could recycle pension income (e.g. from a previous company scheme, for example) into a new pension arrangement thus getting further tax relief. NB you can’t generally do this with the tax-free lump sum. You could use tax-free lump sums for debt repayment, though and still carry on working and saving into a pension.
Consider completing a lifetime cash-flow analysis with your financial planner to see if you can afford the lifestyle you want. You can model exiting the business as well as identifying any risks to achieving your goals, such as early death, long-term illness or a market crash. This can be massively powerful in helping you shape the future.
So, hopefully there is some food for thought here. If you’d like to discuss any of these points in greater detail, don’t hesitate to get in touch. After all, individual circumstances vary greatly and there is no ‘one-size-fits-all’ solution.