Protect your wealth as your business grows

As the economy emerges from the worst effects of the coronavirus crisis, business owners can begin looking forward to a brighter future. At the end of 2021, the UK’s GDP equalled pre-pandemic levels1, giving cause for optimism.

With more certainty ahead – barring the emergence of a new variant – now is a good time for entrepreneurs to consider their own finances. For the majority of business owners, personal wealth is closely linked with the success of your company, which means business decisions can have a significant effect on your life outside work.

Indeed, it’s not uncommon for the lines between personal and business wealth to become blurred.

“An entrepreneur is extremely reliant upon the success of his or her business,” says Simon Martin, Chartered Financial Planner at St. James’s Place. “It provides for their present and future – their lifestyle is dependent on how their business is performing – so naturally it’s going to be vital to get it right. Business-owning entrepreneurs often aren’t well diversified, so considering diversification as a means of reducing risk is important.”

Thinking about risk

As the pandemic fades, there’s a lot to consider. Perhaps, with the future now holding a greater degree of certainty, you’ll re-evaluate your attitude to risk. Whichever direction you choose, it pays to have a plan and take advice.

If your business is still in its early stages – or if you haven’t yet thought about it – you should take counsel on the most tax-efficient way to pay yourself and how to develop the best tax plan. Doing so can save time, hassle and money.

“Think about what actions you may need to take,” says Simon. “It might be protection in terms of life insurance. It might be an element of diversification within your business; maybe look at new markets or new opportunities. Creating a really detailed financial plan that incorporates both business and personal assets is important. And engage with specialists to look at your business and make sure it’s as efficient and effective as it can be.”

Look after yourself and plan ahead

A good way to ensure your wealth is managed effectively is to start by looking after yourself. Talk to friends, family and advisers for a rounded view, then make your own decisions when you’re happy you have enough information.

Forward thinking and strategic planning is essential so you can work out what you want in retirement, when you’re going to retire and what you want to leave to others.

Extracting value from your business

There are a number of different ways to extract profits from your business to fund your personal life. SME owners who do this via dividends should always remember that the tax on these earnings is owed by the individual and must be paid at the end of each year.

The tax rules on dividends will change from April 2022, with a planned increase in dividend tax of 1.25%. There remains a tax-free dividend allowance of up to £2,000.

Other changes include an increase of 1.25% on National Insurance, which does not apply to those paying themselves through dividends but does apply to entrepreneurs who take salaries from their business or sole traders in their year-end tax return.

Pension planning

Another smart way to protect your wealth is paying into a pension. Not only is this probably the most tax-efficient way of extracting profit from your business, but it’s also an essential part of planning for the future. Many entrepreneurs think that selling their business will provide enough funds for a lengthy retirement, but this is often not the case – so make sure you consider paying into a pension if you aren’t already.

Seek advice

We can offer expert advice to help you develop a seamless and robust plan that spans your business and personal finances. Talk to us today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Sources:

GDP Monthly Estimate, UK: December 2021, Office for National Statistics, February 2022

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