Pensions, Protection and Investments

23.02.2022
James Rix
Financial Planning
James Rix for Lovewell Blake

In conjunction with Matthew Harrington, financial adviser for Lovewell Blake Financial Planning.

James Rix for Lovewell Blake

No matter if your business is small or large, three things that are often overlooked when running a business are; Pensions, Protection and Investments. These three pillars are essential to effective planning for any business. With the financial year end approaching now is a great time to act.

We have outlined some of the items you should be considering when running a business. They are all effective tools in the planning process, and with regards to protection as a fall back if the unexpected happens. This is a shared focus, from both a corporate accounting and financial planning perspective. 

Pensions

As all businesses are now aware, auto-enrolment pension schemes have been in place for over five years. These require employers to both enrol and contribute towards their employees’ pension. Contribution levels have recently been increased to assist employees with what has been viewed as a previous gap in individuals contributing towards their long-term future. 

As part of our work with businesses, our financial planning team can assist in various areas:

  • Help ensure that you continue to meet your Auto-enrolment obligations
  • Reviewing existing schemes which may have been in place for several years to ensure they remain competitive
  • Provide pension workshops for staff, keeping them fully informed of their pension options and help them make the right decisions

Pensions are also a useful tool for tax planning.

Directors have the opportunity to use pension contributions as part of their overall remuneration package. Whilst salary and dividends provide an income for the ‘now’, pension contributions from your business to your own pension help to provide for your future too.

For a corporate point of view these pension contributions are allowable for corporation tax relief. With the CT rate increasing next year it is an ideal time to review your existing allowances and contribution levels. It is important to note that pensions work on the paid basis. Therefore, the actual contribution must be received by the pension scheme prior to a year end for it to be included in that year. 

With current pension allowances, you can contribute up to £40,000 each tax year to your pension from a company contribution. In addition to this, you may be able to bring forward unused pension allowances from previous tax years, helping you to catch up on your pension savings if they are behind where you need them to be.

Protection

This is an area that has gained traction over recent times. When protection is mentioned instinctively you think to your personal position with perhaps medical, life or critical illness cover for example. The question we usually pose is if you protect yourself why not protect your business. 

There are many types of protection that a business can have with some of the popular options including group life and key person cover. Group life is becoming more popular with businesses and is usually offered as an incentive to staff, giving them peace of mind that their families would receive a level of financial security from their employer if anything happened to them.

Keyperson cover is life insurance designed to provide a cash lump sum to the business to protect against the loss of a key individual (through death or critical illness). This can help protect against risks such as the loss of profits directly attributable to that person or cover the costs of recruiting and training a replacement.

Furthermore, Business Loan Protection can provide a cash injection to the business in the event of death or diagnosis of a terminal illness (and potentially Critical Illness) of a guarantor that could result in the borrowing being called in by the lender. This type of cover can provide the security of knowing that the borrowing can be repaid without disrupting cashflow during what would undoubtedly be a stressful time.

Lastly a type of protection that can be overlooked is Shareholder Protection, where there are two or more individuals involved in the business. If one passes away, then their spouse may have no wish to continue with the business but still owns the share capital as part of the deceased’s estate. Protection can be put in place to buy out the deceased’s ownership at the market rate. Not only will the surviving individuals be able to continue the business but the estate benefits from this also.  

Investments

This an area which from a corporate point of view is not considered often. 

Businesses have the ability to invest within the corporate wrapper. A common misconception is that an individual will have to withdraw funds and therefore potentially suffer income tax to invest.

With a corporate investment, the funds will be owned by the company and any profits or income received tax at the applicable CT rate. This is advantageous for most taxpayers even with the CT increase. If in future the investment is crystallised again this is subject to CT rates. 

One point of caution is that this will create a non-trading asset on the balance sheet. If you are thinking about selling the business, restructuring, or making a significant change then it may not be wise to invest using this entity. A common way to avoid this issue is to form a holding company. Funds can then be transferred to the new company free of tax and invested in the new entity. This will then not affect the balance sheet and any changes you wish to make.  

There are different types of investment products that can held by a company, such as Investment Bonds or Collective Investment Accounts. Which one may be right for you will depend on the structure of your company, your investment objectives, and longer term plans for the business.

If you have any queries about the above or wish to discuss further

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