Business owners often prioritise building and running their businesses over managing their own finances. However, delaying financial planning can result in missed opportunities and increased risk. Taking control early can enhance long-term financial security and provide confidence. 

Taking income from your business: salary and dividends business owners have flexibility in how they draw income, often combining salary and dividends for tax efficiency. 

Salary tax considerations: taking a salary is a common method of income. Salaries are treated as business expenses and taxed under standard income tax rules. As of the 2023/24 tax year, the additional-rate threshold has decreased from £150,000 to £125,140. Understanding these thresholds can help you avoid unexpected tax bills. 

Dividends for tax efficiency dividends allow owners to distribute profits in a tax-efficient way. However, the dividend allowance has been reduced from £2,000 in 2022/23 to £1,000 in 2023/24 and will decrease further to £500 in 2024/25. Dividends are not subject to National Insurance contributions, offering potential tax savings. 

Creating Financial Security as a Business Owner

Build an Emergency Fund  

An emergency fund offers liquidity during unexpected events. While recommendations vary, holding three to six months of expenses in accessible savings is a common benchmark. 

Secure Financial Protection  

Short-term savings may not be sufficient for medium-term or long-term security. Financial protection products like income protection and critical illness cover offer tailored risk mitigation: 

• Income protection: Provides a regular income if illness or injury prevents you from working. 

• Critical illness cover: Pays a lump sum upon diagnosis of specified serious illnesses. 

• Life insurance: Offers financial support to dependents in the event of death during the policy term. 

Planning for the long-term understanding and contributing to pensions early is crucial. Delay can reduce the future value of retirement savings significantly. For example, pausing contributions for one year can result in a loss of thousands of pounds by retirement. 

Pensions as a Business Strategy  

Pension contributions made through the business can be classed as allowable expenses, potentially saving up to 25% in Corporation Tax. 

How much to save when planning for retirement requires: 

• A defined retirement age 

• Desired retirement income 

• Consideration of inflation and lifestyle changes 

In addition to private pensions, assets such as property, investments and the State Pension can support retirement income. A comprehensive financial plan can consolidate and optimise these sources. 

Tax-Efficient Benefits of Pensions 

1. Tax Relief on Contributions Tax relief is available based on the contributor’s income tax bracket: 

• Basic rate: £80 contribution = £100 in the pension 

• Higher rate: £60 contribution = £100 in the pension 

• Additional rate: £55 contribution = £100 in the pension 

Higher and additional rate taxpayers may need to file a self-assessment to claim full relief. Failure to do so can result in missed entitlements, as shown in past research by PensionBee. 

1. No Capital Gains Tax on Investments Investment growth within a pension is exempt from Capital Gains Tax (CGT). This contrasts with non-pension investments, where CGT allowances have fallen from £12,300 to £6,000 in April 2023 and will reduce further to £3,000 in April 2024. 

Why Business Owners Should Work with a Financial Planner

While an accountant manages the business side, a financial planner focuses on personal financial goals and resilience. Four key benefits include: 

• Clarifying personal financial objectives 

• Structuring a plan to optimise income and investments 

• Strengthening long-term financial stability 

• Supporting planning beyond business ownership 

If you’re a business owner ready to take control of your long-term financial security and make the most of pension opportunities, contact us or book a no-obligation 15-minute call to explore your options. 

Adam Walkom