Congratulations! It’s been an amazing year for you, hasn’t it?!
You’ve had your best months ever in your business.
Your income is growing year on year, month on month and this last year has just been incredible.
BUT now you really need to get this cash organised! Because you can’t go into your next financial year with this money sitting there in your business, doing nothing.
So how do you strike the balance between what you take out as salary and dividends – and what you leave in your business account?
In some ways, it doesn’t matter! Because once you’ve paid the corporation tax on the profit, the money is yours.
You can take it out of the company and pay tax if you want to keep it, or you can leave it in the business and reinvest it into your next phase of growth.
But this blog is about #7 smart things to do with that money, if you haven’t already thought of them!
We’ve talked before about putting money away for tax and having 3-6 months’ salary in your Directors Account. So if you’ve NOT got that sorted, it’s best to go back and read that blog first.
Then here’s what to consider next!
1. The future…
Aka your pension contributions!
And yes, I know, you may never plan to stop working (when you love what you do and you’re driven to create, I get it).
BUT this is all about having choices, when the time comes.
And it reduces your corporation tax bill.
You can pay up to £40,000 a year into a pension. The good news is you can pay in, or your employer can pay in – and as a limited company director, you are the employer.
So if there’s spare money sitting in your business current account that you want to get out before the year end, to reduce your corporation tax bill, putting it into your pension can be a really smart thing to do.
But even better than that – you’re allowed to carry forward the allowances for the previous two years.
So in the two years running up to now, if you haven’t put in the full £40,000 because you couldn’t afford to, but your business has grown fast – have a chat with your accountant or Financial Adviser to see how much you can put in.
2. Big investments
Are there any big investments you could or want to make in your business?
Equipment that needs replacing or upgrading? Or upgrading yourself, in terms of training or mentorships that will really skyrocket you to where you want to be?
And if you’ve covered all that off…
3. Paying yourself more!
You might decide that now is the time to start paying yourself more money each month and set your standing order that bit higher.
In the world of business right now, I see a great deal of worry about paying higher rate tax.
But paying tax is a GOOD thing.
It shows you have a successful business. It’s about allowing for and mitigating the tax – so let’s go into that bit more!
Let’s say you want to pull £10,000 a month out of your business into your personal account. That’s £120,000 a year. What can you do to reduce your overall tax bill?
4. Basics to reduce your tax bill
The first thing is to accurately record any charitable donations you’ve made; use the Gift Aid Scheme and send everything to your accountant. It could be donating to a charity; church; school PTA or registered sports club.
There are loads of way to do it but it pushes your tax threshold up, so you can earn more before the higher rate tax kicks in.
Next, if you pay personally into your pension (rather than your limited company paying in – some people do both), you can use that to push up your higher rate threshold too.
And when you’ve done that…what else?
5. Investments (you may not have heard of before)
There are some investments available like Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) that were set up by the government, to encourage people to invest in small unlisted companies.
This can be quite a risky way of investing – although there are now products available that can minimise some of this risk for you – so why would you want to do that?
Because there are some amazing tax breaks available!
For example, if you invest £6,000 into a Venture Capital Trust, you’ll get nearly £2,000 off your tax bill that year (it’s 30% – so £1,800 – but you get the idea!). There are limits to how much you can put into VCTs, but the limits are really quite high.
The other important thing to remember is that you need to hold them for at least five years, to keep the tax-free status. Any income you earn from the dividend is also tax free.
So although it can be quite a complicated investment, if you’ve already maxed out your ISA allowance and you’re looking at something tax efficient, it can be a really good thing to do.
6. Pensions for your kids!
We’ve already talked about pension tax relief – but if you have kids, another thing to look at is setting up pensions for them.
You’re only allowed to pay in £2,800 per year, but you can do that every year, and they get the tax relief. Which at the time of writing, equates to an extra £700 added to their pot each year for free.
If you did that for just 10 years of your child’s life, by the time they get to 55 and can draw on the money, they’re going to have a sizable pot because it’s had lots of time to grow.
7. Property, art, wine and gold…
If you’ve paid off any debt, got all your emergency savings and other things in place – and you’ve still got more money than you need…
It’s time to look at other investment streams.
Maybe you want to consider buy to let property or property development. Maybe you want to invest in a different type of business altogether (hopefully something quite hands off, so it doesn’t take too much of your time).
Maybe you want to buy art, vintage bottles of wine or gold. There are all sorts of things you can do. And you can diversify.
BUT you should only do this once you’ve got all your ducks in a row. It’s so important that the bulk of your money is in regulated financial products, so if something goes wrong, you’re insured and you’re covered.
We’ve all heard of people who’ve invested their money in something that looked like it was too good to be true. And it was and they lost everything.
None of us wants to be that person.
If you’d love some help with all this? The Wealth Builder Experience is for you!
Together, we’ll work on taking your surplus business income and turning it into £500k+ of passive income assets in the next 5 years, based on 3 key areas of focus:
- Debt / borrowing
- Cash / liquidity
- Future self / assets.
We start with an intensive in person day together– to organise your financial foundations; get a clear picture of what your future looks like; and create your Wealth Strategy Plan (with all your milestones and markers, to keep you on track).
Then, we have follow up Zoom calls at the end of month 1 and month 3.
At the end of 6 months, we do a final follow up session, with a celebration lunch.
You’ll get 1:1 support from me throughout our 6 months together, via email and Voxer (office hours), plus access to my membership and any training programmes I run during that time.
And moving forward?
Maybe you’ll decide to work less, because you no longer need to draw this level of income from your business.
Maybe you’ll decide open an orphanage, set up a charity or sponsor a child through school.
Money gives you choices.
It’s not about the money itself, but the feelings it creates and the opportunities it gives you. The more money you have, the more people you can help.
Being successful in business is an amazing thing. You touch so many more people and impact so many more people’s lives.
I’d love to support you on your journey!
Until next time,
Claire