12th November 2021
As well as having a financial plan for yourself, you should also have one for your company. You will need to consider:
Your business plan and your financial plan are intertwined, as both need to be carefully monitored, but will ultimately help you to achieve your goals.
So as a company director, how can you align your business and personal financial plans?
Control Over Your Earnings
As the director of the company, you can, to an extent, control how much you earn.
If you increase productivity or cut costs, you can earn more. If you want to re-invest more into the business, you can withdraw less.
Your personal financial plan can help you to establish how much you need to earn to achieve your goals. This will take into account:
If you know how much you need to earn, this can help to inform your business decisions.
Of course, it is not that simple, as the business will incur costs that are not within your control. The cost of employing people, renting premises, buying supplies, and obtaining suitable insurance can increase your business expenditure, sometimes at short notice.
The key is to make sure your business has strong cashflow and reserves to deal with unforeseen events.
Structuring Your Income
As a director, you can decide how to take your income from the business. This can include:
A combination of the above options can usually be the most effective. Most directors take a small salary (for example, £8,000), which is enough to build up National Insurance credits (and therefore entitlement to the State Pension), without actually paying National Insurance contributions.
Your accountant can help you structure your income in the most efficient way.
Maximising Your Pension
As the owner of the business, you do not have the security of a workplace pension scheme, and need to make your own arrangements.
In general, pensions are a vital component of your financial plan. You receive tax relief on contributions, tax-free growth on the funds, and can withdraw a tax-free lump sum of 25% when you retire, Pensions can also be passed on to your beneficiaries. This is free of tax if you die before age 75. After age 75, your beneficiaries would pay tax at their own marginal rate on any withdrawals.
You can make pension contributions either personally or through the business. Company contributions are usually the most efficient, and have the following benefits:
Your pension can also, in some cases, help you achieve your business goals. Some pensions can buy commercial property, which can be used as premises for the business. Depending on the type of scheme, your pension may also be able to lend money to your business. These are complex arrangements, and advice is strongly recommended.
When you are employed, you may receive sick pay, private medical insurance, or death in service benefits as part of your remuneration package.
As a company director, if you want these benefits, you need to set them up yourself. However, you may be able to get a better deal through the company than through a personal arrangement, particularly if you are willing to offer similar benefits to your employees.
It’s easy to perceive every additional expense as reducing your profits, but in the case of protection, this is often a short-sighted view. Adequate protection can mean that your business can still run efficiently if the unexpected happens.
Even if you have just started your company, it’s worth thinking about what you would like to happen when you no longer can, or wish to, work in the business anymore.
Some potential exit routes are:
If you own a business, it is important that your tax, legal, financial, and personal affairs are managed in sync so that you get the most out of your business, and can achieve your personal goals.
Please do not hesitate to contact a member of the team to find out more about financial planning for business owners.