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ATTENTION BUSINESS OWNERS : ARE YOU MAXIMISING YOUR FINANCIAL PLANNING OPPORTUNITIES ?
by Sam Hulson of First Equitable
Developing and running a successful business is usually a hugely demanding and incredibly time-consuming vocation ; hopefully offset by the enjoyment and satisfaction that this can bring – and ideally , some healthy financial rewards over the long-term .
Financial planning It is therefore no surprise then , that business owners often overlook ( or simply don ’ t have time ) to review or attend to financial planning matters . Take pensions for example : it is estimated that 4.8 million people in the UK run their own business , but only 14 % of them are saving into a pension . Whether a sole trader or a limited company owner , paying into a private pension not only helps you make provision for a healthy retirement ; it can also help you save tax too .
What are the tax benefits ? For business owners and company directors : contributions to pensions can be offset against corporation tax . This can be a great alternative ( or additional ) form of remuneration to salary and dividends . Your company can make gross pension contributions of up to £ 40,000 per annum into your pension scheme and there is also carry forward : this allows you to make use of any unused allowance during the previous three tax years ( up to a further £ 120,000 ). Unlike salary , pension contributions are exempt from National Insurance of 13.8 %.
For sole traders and partnerships , contributions to pensions can be offset against your income tax liability . The pension contribution can be up to 100 % of earnings ( subject to the £ 40,000 annual allowance ; however , carry forward can also be used ).
Those drawing high incomes from the business will need to be mindful of the tapered annual allowance : This involves a bit of calculation , but basically affects people with an adjusted taxable income over £ 240,000 ( pension contributions are included in the definition of adjusted income ) and means that for every £ 2 of income over £ 240,000 , an individual ’ s annual allowance is reduced by £ 1 – with a maximum reduction of £ 36,000 . Either way : making pension contributions is a valuable tool all business owners should be utilising – and that ’ s before we look at other potential benefits such as being able to use your pension to purchase your commercial premises .
Tax-efficient life cover Whist many business owners will hold some form of life policy – often linked to a mortgage or similar , very few we come across are making use of the most tax-efficient options available to them . Here we will discuss the benefits of Relevant Life Cover .
What is Relevant Life Cover ? Put simply , this is a term assurance policy allowing businesses to provide tax efficient life cover for their employees ( including salaried directors ). It is designed to pay a lump sum if the employee dies or suffers from a terminal illness . Some providers have a ‘ significant illness ’ option , which can pay a lump sum if the employee is diagnosed with a condition covered by the policy which leads to retirement or anticipated retirement . This type of policy can de ideal for smaller or a one-man Limited Company . It can also be used for large companies where there is a need to put in place a bespoke arrangement for key directors providing a greater benefit .
Key criteria & eligibility
• The life covered must be a UK resident employee of a UK resident business . This includes salaried company directors / partners and single ( salaried ) directors of a limited company ( e . g . IT contractors );
• Equity partners , sole traders and anyone treated as being selfemployed are not included ;
• The policy owner ( s ) can be a Limited Company , a Limited Liability Partnership , the individuals within a Partnership or a Sole Trader ;
• The employer is automatically a trustee and can appoint up to three others ( the life covered could also be a trustee );
• The policy is set-up under a discretionary trust and the potential beneficiaries include the employee covered , their spouse and any children ;
• The trustees have discretion to pay to any potential beneficiary and could also use their discretion to pay any terminal illness or employee significant illness benefit to the employee covered .
Tax advantages for the business
• The premiums should be treated as an allowable expense for the business creating a corporation tax saving ;
• There are no NI contributions on the premiums .
Tax advantages for the employee
• Premiums are not usually treated as income paid to the employee or a benefit in kind ;
• Benefits will usually be paid free of Income Tax , Capital Gains Tax and NICs ;
• As benefits are held under trust they should not be treated as part of the employee ’ s estate for Inheritance Tax purposes .
Finally , unlike a Death-In-Service benefit : the benefit paid on death won ’ t form part of your Pension Lifetime Allowance - a key advantage for those with larger pensions .
Time for a financial review ? Here are just a few examples of the financial and tax planning opportunities available to business owners . We can work with you to develop a detailed and bespoke financial plan that will ensure you are maximising every financial planning opportunity available to you and in the most tax-efficient manner possible .
To arrange your free initial consultation , or if you would just like to ask a few questions , please give us a call - or complete an enquiry form via our website . You can also email me at : sam . hulson @ first-equitable . com
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