Personal finances and your business

The Directors and employees of your company may be worried about financial security, so it’s worth thinking about insurance cover for their peace of mind:

Critical illness cover

Will pay out a one-off, tax-free payment that can be used to support an individual and their family if they get a serious illness and are unable to work.

Life insurance

Cover in the event of a critical accident, illness and death. If you work through a Limited Company, life insurance, sometimes called ‘Relevant Life’ can be provided tax efficiently through your business.

Income protection insurance

Should an individual be unable to work because of injury or illness, Income Protection Insurance pays them, usually until retirement, death or your return to work.

As the director of a limited company, say your monthly premium for insurance was £30. You could pay this personally or from your company.

Premiums paid personally will be paid from your post tax income. That means that a £30 premium would actually cost you £40.13.

If you made a payment to a relevant life insurance policy from your company, the actual cost of your £30 premium would only be £24.30, saving you over £15 a month. That’s a 39% saving!

*Based on a higher taxpayer rate of 33.75% and Corporation Tax at 19%.

Say your company earns £100.

You’ll have to pay 19% corporation tax, which brings the amount down to £81.

To take this money out of the company, you’ll take home your income through a mixture of salary and dividends.

If you took this £81 as a dividend, it’s likely you’ll incur dividend tax of 33.75%. That brings the total amount you take home down to just over £53.

Take your pension from here and you’ve lost £47 of your hard-earned cash.

However…

Invest the £100 in a pension through your company, you can contribute the whole amount AND receive corporation tax relief.

That means you have up to £119 available for investment – 55% more than if you’d taken dividends and then paid into a pension.

As a contracting or small business there are a variety of tax efficient savings and investment options available to the business and its directors. Some of the areas for discussion include:

Pensions

Pensions are a great tax-efficient saving opportunity for limited company directors. Where someone becomes a director for the first time, they will have to look after their own pension arrangements, as opposed to having this organised by their employer as well as the arrangements for their employees.

ISAs

Individual Savings Accounts (ISAs) offer a tax-free structure for investments and savings be that cash, investment funds or stocks and shares. There is a limit to how much money you can put into an ISA in each tax year, and ISAs come in a number of different forms such as Junior ISAs or Help To Buy ISA so it’s worth discussing the options with a professional.

Investments

The type of investments that you may wish to choose depend on your personal circumstances, goals and attitude to risk. From cost-effective savings schemes to advanced wealth strategies, there are many investment options available so it’s essential to discuss the details.

Mortgages can pose a difficulty for business owners as some lenders ask for proof of income that’s hard to provide if you’re taking a combination of salary and dividends. A financial adviser who understands how you operate will be able to source the right mortgage for you with a provider who understands your circumstances.

Many people also choose to invest in property through a buy to let property or portfolio, and therefore need to source a buy to let mortgage for this purpose. There’s also the option to invest through a Limited Company, which may make better financial sense, depending on your circumstances.

Damian is a contractor purchasing a buy-to-let property. Based on the value of the house at £250,000 and a 25% deposit of £62,500, he can:

Get a standard buy-to-let mortgage

Pay £770 a month (or interest-only at £270/month) on a 2-year fixed rate of 1.73%.

Invest through a Limited Company

Pay £840 per month (or interest-only at £389/month) on a 2-year fixed rate of 2.49%.