Building a business takes a lot of hard work and many entrepreneurs find themselves treading water for the first few years before they become profitable. After reaching this milestone, they might consider how to grow the business in the future, and this typically requires a lot of investment.
Many entrepreneurs reinvest spare funds in the business to help it expand, and this can mean they neglect their own personal financial plan. As a result, some business owners may face financial challenges in later life.
Indeed, according to FTAdviser, self-employed people aged 35-54 are more than twice as likely to have no pensions than employed people of the same age. It could also be more difficult for business owners to build cash savings or invest if all their money goes back into the business.
Fortunately, working with a financial planner could help them create a plan for their personal wealth while also supporting the business.
Read on to learn why entrepreneurs might benefit from working with a financial planner to preserve their wealth.
A financial planner can help clients extract wealth from their business
Finding a balance between investing in the business and funding their personal life can be challenging for entrepreneurs. Your business owner clients may dedicate too many resources to the company and neglect their own wealth.
A financial planner can help your clients explore different ways to pay themselves and understand the potential benefits of each. Methods for paying themselves include:
- A salary
- Dividends
- Pension contributions.
It’s important for your clients to consider which of these methods they use to extract wealth from the business because there are potential pros and cons to each.
For example, dividends are normally taxed at a lower rate than salary, but the business must be turning a profit to pay dividends. Additionally, dividends are not classed as earned income, so don’t count towards entitlement for certain benefits including the State Pension, Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), or Statutory Sick Pay (SSP).
Often, business owners use a combination of dividends, salary, and pension contributions to pay themselves. A financial planner can help your clients determine the most tax-efficient way to extract wealth from the business.
This ensures that your clients have enough personal wealth to meet their short-term financial obligations and work towards long-term goals.
Entrepreneurs may need help creating a retirement plan
Many entrepreneurs fail to plan for retirement as they believe that their business will fund their lifestyle when they’re older. According to Business Matters, almost a third of UK business owners plan to sell their company to fund their retirement.
Some clients might also hope to pass the business to family members and continue drawing an income from it.
Yet, this could be a risky strategy because the business might not remain profitable, or your client may struggle to sell it for as much as they hoped for. Consequently, they might not be able to fund their desired lifestyle in retirement.
Working with a financial planner could prepare your clients for their retirement so they don’t have to make sacrifices to their lifestyle.
Once they’ve discussed ways to extract wealth from the business, a financial planner can help your clients save and invest some of those funds for later life.
They can also use cashflow planning to give clients a better understanding of how much they need to save to fund their desired lifestyle, and what level of pension contributions they need to make to achieve this goal.
Consequently, your clients may be better prepared to fund their retirement, even if the business doesn’t generate as much wealth as they hoped.
Your clients could potentially use pension contributions to mitigate certain taxes
A financial planner will discuss the most efficient ways for your clients to draw personal wealth from the business and potentially reduce the tax they pay. They can also explore ways to mitigate certain business taxes, allowing your clients to retain more of their wealth.
Pension contributions are a good example of this. Your clients can pay their pension contributions directly from the business rather than their own salary. If the business is a limited liability company, these contributions are usually considered “allowable expenses”.
Consequently, your clients can offset pension contributions against their Corporation Tax bill, effectively reducing their profits so they don’t pay as much tax. Additionally, the business doesn’t pay National Insurance contributions (NICs) on pension contributions.
However, payments to a pension are only considered allowable expenses if they’re in line with the contributions that other employees receive.
A financial planner can explain how clients could potentially take advantage of these rules about pension contributions to build their own savings while also reducing business taxes.
Pensions are a very tax-efficient way to build wealth separate from the business. As such, they may be a crucial way to build personal wealth that grows independently of the company, so your clients can comfortably afford to fund their lifestyle in retirement.
Estate planning may be more complex for business owners
Some clients may decide to sell their business in later life and use the proceeds to fund their retirement. Alternatively, they may want to keep the business and pass it to loved ones when they’re gone.
Estate planning may be more complex in this situation as there are business assets to account for as well as personal wealth. Your clients may need to consider:
- Who takes control of the business
- Who inherits shares and other business assets
- How other non-family shareholders are treated
- How personal wealth is distributed
- The potential tax implications of passing their business and personal wealth to loved ones.
Certain shares and business assets are exempt from IHT so your clients may be able to pass parts of the company on without triggering a tax charge. However, a client’s family may pay IHT when inheriting their personal wealth, depending on the size of the estate.
The rules around IHT can be complex and any mistakes could be costly. That’s why working with a financial planner can be so beneficial as they can help your clients understand the tax implications of wealth transfer and create a robust estate plan.
This ensures that the client’s wishes are fulfilled when they die and their business legacy is protected. It could also help reduce the IHT that their family pays.
Your entrepreneurial clients could preserve more of their wealth and eventually pass it to loved ones if they seek guidance in these areas from a professional financial planner.
Get in touch
If your entrepreneurial clients need help preserving their wealth, we can support them.
They can contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
