Over the past few months we have presented a range of content promoting the idea of why businesses should work with a Financial Planner.
Convention might tell you that financial planning is for individuals – we think it extends to businesses just as much.
One area where the need is most pronounced is the happy subject of how you might want to pay yourself. In many ways this is now a complicated subject, not easy to cover in a short article. But we will try to show you how the question should, at least, be tackled.
The complication arises from several factors:
- Your business structure will determine how you can pay yourself. For example, only a company can pay dividends, so the question of whether dividends are better than salary are irrelevant to anyone who is not a director (or shareholder) of their own company. If you are a sole trader/self-employed or in a partnership, this is not even a possibility (although, of course, you could switch from a self-employed to a limited company structure, if you felt it might improve your position?).
- On the subject of dividends – there is a major change in the way these are treated and taxed coming in April 2016.
- You might elect to pay yourself via some form of pension contribution, this is now far more potentially attractive as a result of the Pension Freedom rules, which means you can take money out of your pension flexibly from age 55. However contrary to this, there are restrictions on what you can put in and then take out in short periods of time, at certain ages.
- Then any person, within any business structure, might have external factors (for example income from property, their spouse’s position, fluctuations in income/expenditure year to year) which could affect how they pay themselves and the advantages and disadvantages of different methods. These pros and cons may vary from year to year.
Hopefully you can see therefore that the question of how to pay yourself from your business is not necessarily a simple one to answer!
This is where financial planning comes in and this is also where your accountant might need help.
Many business people look on the question of how to extract profits from their business as a question which can be rephrased “how do I most tax efficiently take money from my business?”
The tax efficiency is, indeed, a major consideration. This is why the first port of call to address the question is often the business’s accountant. However tax is just one aspect.
Getting the balance right between the different options is a much broader consideration which aims to deal with many of the complications touched on above.
It is more than a question of tax and it is more than a question of what’s right for this year. How you pay yourself should be put into the context of your longer-term financial plan. Only then can the balance be properly quantified.
If you have £50,000 of profits and want to pay less tax, it may well be that you should put some of this into a pension; but how does that fit with your broader retirement planning, how does that sit with the rules that restrict pension recycling? And what pension should you put it into? Most accountants are not regulated to advise on pensions, so they can only produce a broad brush answer, not a specific one.
This is why we advocate specialists, regulated advisers working alongside a business and with the business’s accountant to produce the right solutions.
And as so many businesses are effectively a union between the individual and the business (for a lot of people it is a case of “I am my business”!) the financial planning implications are key ones. How you allocate and pay out money from your business can have a direct impact on your wider financial position, both now and in the future. Vice-versa, your wider financial planning can often ‘answer’ the question of how to allocate money from the business to you.
In this respect it is the old ‘your thigh bones connected to your hip bone’ concept; things don’t work in isolation.
By joining up financial planning and the business requirement, you connect the whole.
This is why we are proponents of working as a team: the business, the individual business owner(s), the accountant and the financial planner working together are likely to produce much better outcomes and solutions.
If you are looking to explore the way you get paid from your business, we would be delighted to sit down and look at this with you on the very base outlined above.