Some of the key questions for any company director or business owner to consider include; to what degree do you expect the business to form part of your assets? How do you view your business in the context of your overall financial goals?
Many small business owners are often too focused on growing and running their business to think about managing their own finances, particularly when it comes to their financial security. However, you could be benefiting from your business while it’s growing by availing of tax reliefs and building valuable service time to protect and benefit you and your family in the long run.
Look after yourself and your business
Separate your personal and business goals
Take the time to distinguish between your personal and business financial goals. It can be easy to put the business goals ahead of your personal goals when you’re running your own business. It’s just as important to set out your personal financial goals and how you’re planning to achieve them such as your children’s education or your retirement.
Draw a Salary
All too often business owners don’t draw a salary from the business in the early years and those who do usually do so adhoc – expenses, dividends, etc. It’s so important as a business owner that you draw PAYE earnings as soon as you can in order to create service for tax purposes. The number of years of service that you have is dictated by the number of years that you’ve had remuneration from a tax perspective. The more service you have accrued the better for you in the long run, in terms of your pension or a possible termination payment from the company. Make sure to pay yourself first. It’s a good habit to set aside money consistently as this provides a safety net for any unexpected expenses.
Protect your Income
Life is unpredictable and as a business owner/self-employed it can be even more so, especially in the early years. Income protection or serious illness cover is something you should consider especially if you have a family relying on your income. Income protection insurance pays out a regular cash payment that replaces part of your lost income if you can’t work due to a medium to long-term illness or disability.
Recent studies from Zurich and Irish Life show that in 2018 there were over twice as many claims for living benefits as for death. Cancer accounted for 61 – 64% of all income protection/serious illness claims with the average age of serious illness claimants being between 51 and 53 years, while claimants of income protection were around 46 years of age. As a business owner/self-employed you may not be entitled to sick pay and even if you are it may not be enough to meet your monthly expenses. This is something the company can pay for, while availing of tax relief on premiums, so you should avail of it.
Protect your Share of the Business
Businesses insure their premises and equipment against financial loss, but very often they overlook their key business assets, their people. Key staff represent the beating heart of every business and no more so than the small, family, business. While insurance can’t replace key personnel, it can provide cash to buy time and cover the costs of temporary staff, recruitment, loss of profits or provide a cash injection. Prolonged absence through serious illness or even death can be detrimental for some of these firms. The risks are the same whether it’s a limited company, partnership or sole trader.
It’s vital that you have a shareholder agreement in place as well as adequate business protection to ensure you retain control of your business in the event of the death or serious illness of your business partner. It also helps to preserve the continuity and survival of your business. Having proper protective structures in place can help lessen the financial impact of such an event giving you a financial cushion to allow you to decide on what to do next.
Extract Value from your Business
So, how do you extract your share from a business in the most tax efficient manner?
- A company can fund a pension scheme on behalf of its owners/ directors based on the level of income they are earning and claim tax relief on it which can be significant. It’s a great way to save tax efficiently for retirement subject to certain rules.
- Retirement relief from capital gains tax can potentially reduce a business owner’s tax bill substantially when they dispose of their share of the business and they can still continue to work in the business if they wish.
- The third option to consider is possible termination payments such as severance pay, ex-gratia payments, redundancy, etc. The business can make a potential payment of up to €200,000 tax free to any employee including its owners. However, this is very much subject to length of service which is why it’s important to draw a salary from your business immediately.
Employ your Spouse or a Family Member
This is something we’ve spoken about consistently to business owners and self-employed clients. If your spouse or a family member is “helping out” with admin, marketing, accounts, etc unpaid, they’re not technically employed by the company so cannot avail of any benefits. Should the company become cash rich and you want to take some of the profits and put them into a pension you can’t do this if that person has no service record, i.e. doesn’t pay PAYE. If you have family members doing any work for the company set them up as a PAYE employee.
Building a new business is not an easy task but it’s vital that you look after yourself and any family members who are helping you grow your business from the start by building their service record and availing of all tax reliefs. This will benefit the company and your personal finances in the long term.
This article is intended to provide general information and is not intended to be financial, tax or legal advice. Every situation is different, and legislation can change. Before making any decisions, you should discuss your specific situation with your tax and legal advisors.