A high growth business
After making a profit the next target is growth, to be a “high growth business” is a goal for many entrepreneurs. Running a business that makes a profit is an achievement, growing that profit year on year is fantastic. But with this comes the next set of considerations and planning requirements;
What do I do with the excess capital?
How to I take more out of the business without paying lots of tax?
How do I make sure my staff stay and I continue to attract more?
I have always been an advocate of people de-risking their personal positions. If an individual has separate assets/investments that are not linked to their business it gives them piece of mind and the ability to direct 100% of their focus to their business which is their primary goal. Extracting excess capital in a tax efficient manner, and then using this capital to build portfolios that can grow independently from their business achieves this goal.
At this point the company should have a good quality pro-active accountant who will provide advice on the combination of salary and dividend and the company’s scope to pay pension contributions. They then need to decide what to do with capital; cash reserves should have been built when the business began to make profits, so long term investment portfolios should be the next step. The tax efficient ISA allowance has now been increased to £20,000 p.a. so beginning to build ISA portfolios should be an initial and annual target.
The pensions that were started a few years ago when the business made profit can now be more fully funded using carry forward allowances and annual contributions allowance. Contributions into pensions can be made directly from the company gross and are considered a business expense so will result in a reduction in the corporation tax bill. Advice is essential here as the calculations for how much can be paid into a pension in any one year depend on a number of factors and the calculation is anything but simple – especially as the contributions get larger. A strategy here may be to plan potential contributions over the next few years in order to maximize funding scope and tax relief.
For those that don’t want to take too much out of the business (or don’t require it) then there is the option to invest on balance sheet. It is important that invested capital is not required for anything in the business and that this can be sure to be the case for at least 5 years if equity investment is considered. There are a number of other considerations here and advice would be essential but it is a viable option for those wishing to grow their excess cash within the business.
The driving force behind most businesses are the staff. Most companies will be in the midst of auto-enrolment now, but viewing the pension scheme as an attractive benefit and providing increased levels of contributions in excess of the minimums is a good way of rewarding staff and attracting new ones. Other considerations could be given to setting up Death in Service Schemes, group private medical cover (can include families) and even income protection. These can all be relatively inexpensive ways of putting together a really attractive benefits package for employees.
These are just a few of the things to consider when a business gets to the “high growth” position they aspire to. There are many other things to consider and everyone’s individual position and business will be different so there’s no one size fits all approach. What is important at this stage is to begin to formulate a plan with your adviser for you and your business.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. Any reference to taxation will be based on your individual circumstances and subject to change.