Mind your business - financial planning issues for owner managers

Business owners get in touch seeking financial advice at all stages of their journey, from financing and start-up through to exit. Each phase has its own themes and challenges when it comes to making sure your legal and financial planning affairs are in good shape. A key milestone - and trigger for taking advice - is reaching a target level of profitability. Often, at this stage, there is a sense that all the hard work has translated into an asset of real value, creating a need to think about how to shepherd and protect it, as well as continuing to grow it.

Firstly, there’s the problem (ha!) of profit extraction. Salary versus dividends has been done to death and various waves of tinkering with tax rules, and rumblings from the Chancellor about removing biases in favour of self-employment, haven’t changed the core position, not yet anyway. Beyond a nominal salary, dividends are generally more tax efficient and the more shareholders (and tax allowances) the better.

What often gets missed though is the option of employer pension contributions, which remain about the cleanest method of extraction in terms of pure tax efficiency. Two caveats, however. Firstly, the main downsides are flexibility and access (pension investments are more restrictive than other tax wrappers and funds are gated until age 55, due to increase to age 57 if you get there after 2028). Secondly, we’ve had a good run folks, but the window is closing. The opportunity for high earners to make large pension contributions is being effectively withdrawn. The annual allowance (contribution level above which tax penalties can negate benefits) was £255,000 not that long ago and is now £40,000, probably tapering down to £10,000 where "adjusted income" (including dividends) exceeds £210,000.

The good news is that carry forward of previous years’ allowances may be available, and you should definitely investigate whether this is available before the bigger allowances fall out of the calculation.

Sticking with the always exciting subject of pensions, large contributions for tax efficiency reasons open up the possibility of holding your business premises in a pension, which often enters the discussions at this stage and can be an extremely effective way to deploy profits.

However it’s extracted, accumulating wealth outside the business creates a need for advice on what to do with it. We will often advise on sensible long-term investments which diversify your risk away from the business. This can feel counterintuitive. Entrepreneurs almost always want to commit their wealth to projects they can drive themselves, which is understandable. However, that often means tethering your fate entirely to the fortunes of a particular sector or area of expertise. We will generally fly the flag for a more balanced (boring, sensible) approach, with a diverse spread of asset and investment types, and usually end up meeting somewhere in the middle.

Increasing profits can create a need to get a grip on estate planning and legal arrangements. As the business becomes more profitable and acquires more value, clients should be looking to ensure things are structured so as to maximise tax efficiency, including on death.

Other defensive measures will include making sure the articles, and associated documents, are robust in their treatment of how things are handled on the death of a major shareholder. Given that increasing profits usually means increasing share values, properly considered and well drafted documents can ensure that this value ultimately ends up in the right place. The alternative is the kind of messy bun fight that nobody wants.