So, you have managed to survive the early years of running a business and profits are starting to present. But how can you take additional remuneration tax efficiently as well as protect the hard work on an ongoing basis?
Personal pension contributions are subject to the relevant earnings test, broadly meaning you must have the earnings to support the level of pension contribution you wish to make. For many directors this restricts what they can pay into a pension because they take a small salary coupled with dividends.
It’s not all bad news. As a director, the company can make contributions on your behalf and relevant earnings are not part of the test here. Instead, the ‘wholly and exclusively’ test is considered. Meeting these criteria means that despite earning low amounts of relevant earnings, directors can still receive larger pension contributions in excess of this.
Pensions offer tax efficient growth, free from taxes such as Income and Capital Gains. Tax relief is also given on contributions for businesses (Corporation Tax) and individuals (Income Tax) depending how they are made. Many pensions also offer an Inheritance Tax-friendly environment and the ability for beneficiaries to receive pension benefits after death. Some pensions can hold direct commercial property (great for purchasing business premises), can be VAT registered and even used to borrow money to make purchases.
There are annual restrictions on pension contributions overall, regardless of how the contribution is made and, therefore, seeking advice is recommended before any action is taken. Also, if you have old pension policies, don’t automatically assume they offer you all the flexibility out there. They may need to change!
Protection for you, your family and the business
When your business has become a success, value will be held in shares. But what happens if something goes wrong? A death of a shareholder or a key player in the business, for example. This can have a devastating effect on not only the family involved but the future of a business too. There are so many ways to safeguard yourselves in the event of the
Shareholder Protection is designed to make the funds available should a shareholder pass away. This means the beneficiaries can sell back the shares to either the remaining individuals or the business itself in exchange for a cash sum, trying to reduce the impact on the day-to-day function of the business.
Key Man Protection makes a provision for the business, should it lose a key player. This can then be used towards recruitment costs, for example, to assist in finding someone as a replacement.
Relevant Life Cover is a single person death-in-service life policy, especially valuable for the following groups of people; small business owners, high earning employees, members of group life schemes wishing to top up their cover. If set up correctly it has much more favourable tax advantages than if the individual paid for the cover themselves.
Seeking professional advice should always be the preferred starting point to ensure your eligibility, affordability and health is assessed properly at outset.
The main reasons individuals take out business protection are:
- Directors with a need for individual life cover
- Directors with dependents
- Directors who wish to save tax
- High earners who are a member of a registered death in service group scheme
- Individuals who wish to ensure their beneficiaries receive cash in place of shares
- Businesses with valuable key players whom they wish to protect
If you are in any of the above categories, Business Protection is likely to be right for you.
Hawsons Wealth Management Limited is authorised and regulated by the Financial Conduct Authority.
To find out more, contact Hawsons Chartered Accountants on 01604 645600 or visit their website.