Business owner? 5 things you should do now to protect your financial future

Published on October 27, 2020 by TFP Team Category: Financial planning & News

Running your own business can require an enormous amount of time and commitment. It’s therefore no surprise that many business owners are so focused on the company that they fail to give their own financial goals the consideration they deserve.

Yet it’s important to think about how your business could impact your personal finances – both now and in the future.

To help you, if you’re a business owner, here are five things you can do now to protect your financial future.

1. Know your number

As a small business owner, one of the challenges you face is to distinguish between how much you want to sell your business for and how much you need to sell your business for.

Perhaps you know that you want to sell your business for the maximum amount possible – but you don’t know what that number is?

So many business owners concentrate on the number they want, not the number they need. Focusing on the ‘need’ provides clarity, focus and peace of mind as, once you know this number, you can start to put your plans in place.

In our experience, the amount you need is often much less than any number you may have decided you want. Realising this is often a ‘light bulb’ moment for clients, and it can be genuinely transformative.

2. Protect your family

When you own a business, it’s crucial to have the right insurance in place. You’ve probably worked for decades to build up your business, so you want to know that the fruits of your hard work will be passed to your family if something happens to you.

Business protection such as key person insurance and shareholder protection are vital to ensure business continuity.

  • Key person protection pays out a lump sum if an important employee dies or is diagnosed with a critical illness. The money is paid directly to the company and you can use it to cover things like loss of profits, recruitment costs, and to pay debts.
  • Shareholder protection lets your business buy shares back from a partner who is diagnosed with a critical illness or dies. For example, if you die your shares would pass to your estate on death – meaning part of the firm could be owned by family members who have no interest in the company’s future. This cover would let your business buy your shares so your family benefit from a liquid cash sum rather than an illiquid stake in the business.

Your business might also want to consider relevant life cover. This is a life insurance plan which pays a lump sum to an employee’s family if they die while being employed by the firm.

The employer pays the premiums and owns the policy. It can be tax-efficient for both you and the business as the cost of a plan is usually an allowable business expense, the lump sum is normally paid without attracting Inheritance Tax, and it doesn’t form part of your pension Annual or Lifetime Allowances.

3. Have a plan!

Returning to point one for a moment – how will you ever know that you have achieved your ‘number’ without a plan?

Only by creating clear goals and having a financial plan in place will ensure that you can achieve everything you desire while still enjoying being a business owner and enjoying a wonderful life in the process.

Engaging with a financial planner will give you the focus you need to achieve your number, and the confidence to make life-changing decisions, safe in the knowledge that you are financially secure.

Planning also gives you the best chance of avoiding tax charges. A financial planner will take a thorough look at your personal and business assets to advise you on the best ways to protect your hard-earned wealth and property.

4. Become the least most important person in the business

In their pursuit to create a successful business in their image, many business owners make the same mistake. They become the go-to person in their company and manage every single aspect of the way the business works.

While it may sound counterintuitive, being the least important person in your business ensures that it will remain successful after you leave.

It also makes your business more attractive to potential buyers. If your company can function without your expertise, a potential buyer doesn’t have to worry about what happens when you’re no longer around.

You need to put systems in place that allow you to provide leadership, vision and passion, but not day-to-day toil. If you can reach a position where you work on the business, rather than in the business, you’ll help to protect your financial future.

5. Don’t be scared of pensions

Pensions are complicated. Rules concerning contributions, allowances, and tax are difficult to understand and it’s not a surprise that many business owners find dealing with pensions intimidating and time-consuming.

The truth is that pensions can be a great way of extracting profits from your business. Making pension contributions from your business (rather than from your after-tax income or dividends) has several advantages:

  • Your contributions won’t be restricted – you will be able to pay up to the Annual Allowance of £40,000 rather than just 100% of your salary
  • Making a pension contribution from pre-taxed company income is an allowable business expense. Your business will receive tax relief against Corporation Tax and effectively save 19% on your pension contributions
  • Unlike a salary payment, employers don’t have to pay National Insurance on pension contributions. Your business could therefore make an additional saving of 13.8% (32.8% in total when Corporation Tax savings are included) by making a contribution into your pension rather than paying you the corresponding amount in salary.

A financial planner will simplify your pensions and ensure they are as tax-efficient as possible. They will also help you to build up the retirement fund you need so, when you finally sell your business, you can enjoy your post-work lifestyle without having to worry about running out of money.

Get in touch

If you’re a business owner and want to find out more about the value REAL financial planning can add, please get in touch. Email or call us on 01621 851563.

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