Managing Your Money and Your Business: A Guide
Find out more about managing your personal financial needs with money from your business – and vice versa...
For anyone striking out as an entrepreneur for the first time, the stakes are often high. Owning and managing a small/medium sized business means that your own personal financial affairs are likely to be tied up in those of the business.
It’s crucial that you always consider how your business is affecting your financial situation – whether you have been running it for two weeks or 20 years.
This guide aims to help you control the flow of personal finances into and out of your business – how to manage the investments you put into the company and the income/profits it provides you with in return.
Furthermore, it will help you choose the business structure that benefits you most financially, learn about tax advantages, how to withdraw profits and make investments, how to manage an exit, and more.
How can I structure the business to best benefit me financially?
When deciding how to structure your business, you need to decide how you want it to fit in with your financial situation.
You need to consider whether you want to form an unincorporated business or a limited one – each option suits different personal financial plans.
If you want your business to be flexible, and to have the freedom to take money out of the business directly, you should consider structuring it as an unincorporated business (as a sole trader, partnership, limited liability partnership etc).
Profits are taxed as income. If you simply want the business to generate a personal income and a pension, being unincorporated is the simplest and most advantageous option.
NICs (Nation Insurance contributions) are lower. You pay less than the contributions required for employees of limited companies.
Partnerships are flexible. Sharing profits among family members/employees is easy – unlike limited companies you do not have to justify levels of remuneration to the HMRC.
Limited liability partnerships limit your liability (it’s all in the name). They tend to be taxed as unincorporated businesses, despite having similar legal requirements to a limited company.
If you’d rather funnel profits back into the business and add capital value, you should consider structuring it as a limited company (a corporation).
You can pay yourself a salary and dividends. These are free of NICs. Watch out for changes to dividends though, find out more info here.
Shareholders pay less total tax/NI on dividends than they would on an equal amount as wages. Though they are paid from after-tax profits (corporation tax being at least 20%), the amount is taxed less than wages would be.
Corporation tax on profits is lower than the relative income tax liabilities would be. However, you will have to pay the cost of filing and audits at Companies House – and make your business info private.
How can I finance my business to reduce personal cost?
There are several options you can take, listed below. Make sure the one you choose gives you the greatest possible tax relief. Everyone’s circumstances are slightly different.
Borrowing bank loans are relatively cheap – but watch out for interest rate increases.
Taking out a mortgage will have lower interest rates than standard business loans, and payment plans may be flexible, allowing you to adjust them according to your situation.
Structure the business to qualify for the Enterprise/ SEED investment scheme (EIS/SEIS). This will mean your business is eligible to give tax relief on investments for small companies, and the majority of trades qualify – find out more here or here.
Make sure your borrowings are secure, and that you aren’t risking too much – can you afford to gamble the family home on a high risk venture?
How can profits from my business be put to personal use?
As an owner-manager, you have two responsibilities – supporting yourself, and supporting the business.
You need to work out how to use your profits in a way that allows you to take out the money you need whilst ensuring there is enough in the business to enable it to remain stable and grow.
If your company is limited, and you need money, pay yourself either a salary or a dividend. Salaries qualify as earnings; dividends do not.
If paying yourself a pension is a priority, a salary is the best option but dividends can be cheaper.
Usually no employer’s NICs are payable so seek your accountant’s advice in this instance. The choice will be dependent on your earning and corporation tax position.
If you have a self-administered payback scheme, you can loan-back money you put into the scheme to finance the business. Loan-backs from pension schemes are not taxed.
You can also avoid having to retain a large gross to keep a desired amount in the business. However, loan-backs must have a genuine business purpose. The HMRC will not likely consider ‘cashflow purposes’ a satisfactory justification. Loan-backs must be secured at a commercial rate of interest. This interest simply goes back into the pension fund, and is not taxed.
If your spouse or partner works for the business on lower earnings, you can make the most of their tax allowances/reliefs but make sure to pay them a salary.
This will allow you to use their personal allowance for income take and the NI threshold. Transfer shareholdings/assets to your spouse/partner. This way you can benefit from lower income-tax bands. (Remember that you will have to explain your remuneration levels to the HMRC).
If you reward your employees with a remuneration package, consider the value of the rewards. Some items can cost less than the value to the employees. Pension contributions, phones and laptops can all provide more value than cost, and save you money.
How can I balance my personal finance needs with my investment needs?
Any owner-manager seeking to grow their business is likely to want to invest – but it’s important that you keep an eye on the accessibility of your money, and don’t tie too much of it up.
Small businesses often require quick access to cash if times grow hard.
If you run a small business, consider investments such as ISAs and pension schemes over corporate investments.
Invest in ISAs and Pension schemes.
They will offer you more flexibility and personal security than corporate investments.
Corporate investment are always risky in small businesses.
It pays to prepare for the worst – if the business folds, how much of your own finances will be at risk?
ISAs can give you the same net income as pensions – providing annuity rates are low. And there are several other benefits:
You have constant access to the fund.
Funds in an ISA are free from income/capital gains tax. Money taken from the business to invest, however, will be taxed.
ISAS can be invested in equities, bonds, or cash. Up to £5,760.
Pensions remain a solid investment – though rules around their taxation are being changed, they are still also a cost effective and tax efficient way of saving.
Make pension contributions as early as possible. You will spread the cost over a longer period, and earlier payments have longer to earn returns returns in a tax-exempt environment.
Some schemes offer you flexibility over how you withdraw benefits. You may be able to draw and income/purchase an annuity at any point that you need it.
Consider the type of pension that will best suit your situation.
Small self-administered pension schemes (SSAS) and self-invested personal pension (SIPP) give you control over your investments. They allow you to invest in many different areas and adjust them along with your changing performance targets.
Stakeholder pensions give you flexibility – and lower fixed charges. You can pay according to your own schedule, as well as stop/restart payments without penalty. The business can also contribute.
Enterprise/SEED investment schemes and venture capital schemes allow you to invest in small trading companies, with several tax benefits – but the risk is always high.
How can I exit my business in a way that most benefits me financially?
The main obstacle to an owner-manager wishing to sell their stake in the business is capital gains tax (CGT).
The standard CGT is charged at 18% – but higher-rate income tax payers may have to pay 28%.
However, there are several steps you can take to reduce the amount of CGT that you are liable to pay.
- You can claim entrepreneur’s relief on gains of £10m or less which reduces CGT on gains from 18% to 10%. You can claim several times up to the £10m limit.
- You can defer payment of CGT in several ways. Loan note payments can defer CGT payments. If you accept your sales payment in loan notes, you can defer payment of CGT until these are cashed.
- Reinvesting in new business assets qualifies you for ‘rollover relief’.
- Reinvesting in companies under the EIS scheme qualifies you for deferral relief.
- Reinvesting in new businesses under the SEIS scheme qualifies you for CGT relief. There is a cap of £100,000 on investments.