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Profit, Plan, Prosper: Year-end Financial Strategies

As a company director or business owner, your financial well-being is deeply intertwined with the health of your business. Whether your financial year-end aligns with the typical cycles or falls at a less common time, the challenges remain significant. From enhancing profitability and managing cash flow to maximising tax allowances and thresholds. Proactive planning can alleviate the stress associated with year-end.

Alternative read: successful planning for business exit

Business year-end strategic financial planning: Tax efficient remuneration for directors

In this day and age the demands of running a business are enormous, not just on our time but energy and wellbeing too. There are lots of reasons why we choose to run a company but one element is to provide financially for ourselves and our families. Business and personal finances are intrinsically linked, whatever happens financially in your business inevitably impacts on your personal finances. Yet business people find it increasingly hard to find the time to manage both. Then, when it comes to your company’s year-end it is a challenging time on top of everything else. You might not have the time to review and plan how you are remunerated and often quick decisions are made towards the end of the year which can have significant tax implications. On top of that a lot of business owners continue to invest surplus cash back in to the company to help grow employees, processes or the business as a whole. It is important as a business owner to get a balance between your own remuneration and your staff’s as often we are very giving. So, we take a look at three different ways of remunerating yourself, the tax implications and what you can do with surplus cash in the business that you don’t want to take as income.

 

Should a director receive bonus or dividends? Which is most tax efficient?

Our personal and businesses finances are dependent on eachother and there are time limited tax allowances available to us as business owners and as individuals. If you do not take advantage of them, you are not making the most of every pound you earn. Not only does that put your hard work to waste, but it also impacts on the remuneration you have left in your pocket or reduces the amount you can invest back in to to the business. So there are a few things you need to take in to consideration when looking at lump sum payments in the form of a PAYE bonus or a dividend pay-out:

Bonus Payment: With a bonus not only would you have to pay tax and national insurance on this but the business would have to pay employers national insurance. It is important to look at the income tax levels so that you can assess whether paying slightly less bonus might put you in a lower tax bracket, meaning that your net pay could be higher.

Dividend payment: if your business is profitable you might choose to pay out on Dividends which will be subject to dividend tax. On top of dividend tax this method of remuneration also doesn’t reduce your company’s corporation tax bill.

When you work with a financial adviser you will be shown a number of options for end of year remuneration. If you haven’t bought in to the benefits of financial advice yet and want to manage your own finances it is important you make time to plan what you are going to do at end of the year and how you want to reward yourself, whilst research the impact this will have on your tax situation.

2024/25 tax tables

The pension route is the most tax effective

Instead of paying a bonus or paying out on dividends you could make a company pension contribution:

  • Someone can put up to £60,000 in to a pension every year, provided they meet certain criteria.
  • Not many people know this is a deductible business expense and therefore the business wouldn’t pay corporation tax on that lump sum.
  • You will not be subjected to any personal income tax.

There are some additional rules in and around carry forward, which could be of benefit to you and different share classes have different rights but a financial adviser could look at your personal situation and the options available to you so that you could make the most of this strategy.

If you are interested in retirement planning don’t hesitate to read our ultimate guide.

Free retirement planning guide

Business investment options

Some business owners may have a large amount of surplus cash in a bank account. After exploring remuneration options you could look at investing some of that surplus cash. If you think about it logically, if you made a personal investment you would need to draw down income from your business, you and the business would pay tax on this income and then you would make the investment. An investment via the business doesn’t have those tax implications, however it would be the business that owns that investment, with yourself as a shareholder.

Allowing profits to build up in a business account means the money isn’t actively working hard enough for you or the company. Investing surplus cash could give your business an additional revenue stream, which could be reinvested in to your business. Investing also gives your surplus cash a chance to grow rather than leaving it to get dusty in a incredibly low interest rate bank account that is fighting with rising inflation. As with all investments, there is a chance you could lose money but a financial adviser can work out your appetite for risk and aid you in choosing an investment right for you. Ofcourse, most business owners have a healthy understanding and tolerance of risk. A qualified chartered financial planner will help you understand the best investment vehicle for you depending on appetite to risk, when and how you need to access the money, how long you want to invest for, your approach to ethical investing and your corporate tax obligations.

There are also some tax efficient investment options that your financial adviser could talk through with you, along with purchasing property for you business via alternative structures.

Finance Podcast: Company year end planning

In a recent episode of Radio Bath, Business Consultant and DJ Cynthia explores key financial considerations for business owners with Unividual’s Strategy & Marketing Director Cherie-Anne Baxter. The podcast delves into the challenges of determining suitable remuneration for business owners, examining how this is linked to both motivation and overall financial well-being. Despite the lingering sunshine, early planning for the end of the financial year is crucial to mitigate stress and optimise business operations concerning profitability, cash flow, and tax efficiencies. Listen to gain insights on how to adeptly manage and plan both your personal and business finances as year-end approaches.

Maximising employee benefits: Bonus vs. pension contributions

When deciding how best to reward your team, it’s important to offer choices that align with their financial goals and life plans. Many employees dream of using their bonuses for holidays, paying off education debts, or saving towards buying a new home. Yet, not all consider the tax-efficient benefits of directing their bonuses into their pension plans.

Choosing to contribute a bonus to a pension can be significantly beneficial:

  1. Employees won’t incur income tax or National Insurance contributions on this amount.
  2. Your business can save on employer’s National Insurance contributions too.

This makes pension contributions an appealing option for financial savvy staff looking to maximise their earnings. It’s a common misconception that younger staff members are not interested in retirement planning. Thanks to the widespread implementation of workplace pensions, younger employees are increasingly knowledgeable about the importance of early financial planning. Investing in a pension early on can reduce the need for heavier contributions later, easing financial burdens in their future.

However, awareness is key. Not all employees may be aware that diverting their bonus into a pension is a viable option. Informing them could open up new avenues for their financial planning, benefiting both their future and your company’s fiscal health. We do have a guide to managing money for people in their 20s and 30s that you may find a useful resource. We also offer a 2 to 3 hour free financial wellbeing workshop to businesses who want to build financial literacy in to the organisation. Encourage your team to consider this option; a well-informed decision is a step towards financial security.

 

Financial wellbeing in the workplace

We all get a bit stressed about money and often we worry so much about making the wrong decision we end up leaving our savings in the bank which can cost us money. Unividual work with a number of different types of businesses managing staff benefits packages and part of this service consists of free financial planning workshops to staff. With the growing trend of looking after employee health and wellbeing this is an added benefit you can provide to staff, something that could change their lives for the better. We look at how you can protect your wealth, the difference between saving and investing, starting off retirement planning, how workplace pensions work and anything else that can be made bespoke to your staff. If this is something you are interested in finding out more about don’t hesitate to get in touch with Cherie-Anne Baxter, our Strategy & Marketing Director. 

Enquire about business financial planning

    Author & Editor: Cherie-Anne Baxter

    Date: 29th April 2024

    Updated: 1st May 2024

    Approver: Quilter Financial Limited 1st May 2024

    Risk Warnings

    The Financial Conduct Authority do not regulate tax planning and some employee benefits.

    The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

    The figures or %s in this article are for the 2024/25 tax year and are correct on the day the article was published.

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