Business, Investment planning, Protecting, Retirement

Financial planning for business owners: 5 key steps

27 January 2023

It has been a tough and turbulent few years for UK businesses. For the country’s 4.23 million self-employed1, the perfect storm of Brexit and the pandemic, followed by staff and supply shortages, the War in Ukraine and the cost of living crisis, has meant increased focus on the financial safety of their business and personal finances.    

The key challenge for many is a need for greater control over their money, while ensuring they have the freedom and security to run their life and business as they want to.

We take a look at 5 key steps in financial planning for business owners.

1. Starting to plan – the importance of a safety net

Developing a holistic plan that sets clear goals and includes tax-efficient investing, pensions, risk protection and estate planning, is the first key step in financial planning for business owners.

Start by reviewing your current situation and set clear financial goals. 

It is inevitable that at some stage in your life you will become ill or unable to work for a period of time. There is no Statutory Sick Pay for the self-employed, which may mean a reduction or halt to your regular income. 

While using personal finances to prop up the business may seem like an ideal short-term solution, consider the pitfalls of pouring all your money into your business, and look at alternative measures you can employ to provide a safety net.

Do you have an emergency fund or cash reserves? Have you considered income protection and if so, have you looked at the deferral period – it may be worth paying higher premiums if your claim kicks in immediately?

Life insurance and business protection may provide peace of mind and help keep your business afloat if needed. Talk to an expert about financial planning for business owners and review your plan at regular intervals to make sure that you have adequate cover for your current needs.

2. Set clear medium and long-term goals

Maintaining a budget is important for both your business and personal finances.

Consider your ambitions for your business and at what stage you hope to retire. How will family commitments impact your goals? And how can you protect loved ones? These are key considerations when it comes to financial planning for business owners.

Setting clear goals for both the medium and long-term can help you better understand the financial position you are in now, and how your business needs to perform to reach the future goals you are aiming for.

3. Effectively manage your pension 

Many business owners consider that selling their business will provide them with their retirement funds, but what if you want to pass the business on to a family member, or the business is not as profitable as you hoped it would be?

Pensions are an efficient way to save for retirement – higher-rate taxpayers receive 40% tax relief on contributions, while additional-rate taxpayers receive 45% tax relief. 

While as a business owner, you won’t get the benefit of a workplace pension, fully funding your pension on an annual basis is an excellent long-term planning strategy. Using a pension to hold accumulated wealth is also very tax efficient. 

When considering the amount you will need to retire – whether that is at 50 or even 80 – you should think about the lifestyle you would like to enjoy when you finish working. The income you will need on an annual basis to support this lifestyle will impact the amount you need to save. 

Read our business owner’s guide to exit planning to find out more about how to plan for retirement and exit your business.

4. Understanding tax 

Understanding your tax responsibilities – you will need to pay income tax and National Insurance – and how to make the most of tax efficiencies, is a crucial step in financial planning for business owners.

If your turnover – not profit – exceeds £85,000 a year, you must register for VAT. Self-assessment also needs to be submitted and paid on time. Remember that anything you buy for use in your business can be deducted in full (capital expenses of up to £250,000 per year).

The UK tax system is particularly complex and navigating it to make sure your finances are tax-efficient can be a difficult task. It is worth speaking to a financial adviser to help maximise your business and personal tax efficiencies.

5. Build your savings and investments 

Although you may consider that your business is your investment for the future, making sure that you are not putting all your eggs in one basket can provide additional financial security.

Consider whether you should be saving regularly and what you should do with an unexpected lump sum. Are you looking to invest for income, growth, or a combination of the two?

Getting a mortgage can also be more difficult if you are self-employed, so you may need to consider alternatives to your usual lenders.

Creating and maintaining the right investment strategy can help you make the most of your hard-earned assets, and is something that our experienced advisers consider carefully when building financial plans for business owners.

How we can help with financial planning for business owners – the importance of a financial adviser

Financial planning for business owners can require a bit of effort and may not be top of your priorities as you work hard to build your business. This is where a proactive financial adviser comes in. By knowing you and your financial goals, the right financial adviser can support you in making changes, keeping things straightforward and saving you time and in the long run, money.

To find out more about how Morrinson Wealth can help you with all five key steps, get in touch. For more information you can also read our 4 key wealth management priorities guide.

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 is generally dependent on individual circumstances.

1 C1: Employment, House of Commons Library, accessed Jan 2023

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