When you’re running a business, there’s always something demanding your attention. Clients, cash flow, employees, growth plans and the day-to-day realities of keeping everything moving can quickly take priority.
But while business owners spend a lot of time thinking about the financial health of their company, it’s just as important to understand the financial considerations that can sit outside of it.
As part of our partnership with AJ Bell, we recently sat down to discuss some of the areas business owners and entrepreneurs may want to be aware of when thinking about their wider finances, from how they pay themselves to pensions, ISAs and keeping money accessible for the unexpected.
This article is for general information only and isn’t personal financial or tax advice. Tax rules and individual circumstances vary and can change, so consider speaking to a qualified professional if you’re making financial decisions.
Salary vs Dividends: What’s the Difference?
One area that can sometimes be overlooked by company directors is how they pay themselves.
For some business owners, taking income through dividends can form part of how they extract money from their company. However, relying solely on dividends can have wider implications that are worth understanding.
One consideration is National Insurance and your State Pension record. Dividends themselves don’t count as earnings for National Insurance purposes, whereas an appropriate salary may help someone build qualifying years towards their State Pension, depending on their circumstances and the relevant thresholds.
It highlights an important point: the way you take money from your business isn’t necessarily just about what lands in your bank account today. It can also have implications for your longer-term financial position.
Don’t Forget About Your Pension
When you’re building a business, retirement can understandably feel like something to think about much further down the line. However, pensions can be an important part of financial planning for business owners.
One area discussed in our conversation with AJ Bell was employer pension contributions – where a company makes contributions directly into a director’s pension.
Depending on the circumstances and applicable tax rules, employer pension contributions can have tax advantages for a company while also helping the individual build their retirement savings.
There are rules and limits surrounding pension contributions and their tax treatment, so this is an area where professional advice can be particularly useful.
Where Does an ISA Fit In?
Pensions are designed for long-term retirement saving, which means there are restrictions around when you can access the money. That’s where other savings and investment options, such as an ISA, can play a different role.
An ISA can provide greater flexibility because money isn’t locked away until retirement in the same way as a pension. For some business owners, understanding the different purposes of pensions, ISAs and cash savings can help when thinking about short-, medium- and long-term financial goals.
It is important to mention that an ISA is an individual account. While pensions can have employer contributions, ISAs are solely from an investor’s own funds. If you want to put money from your business into an ISA, you first have to pay it to yourself as a salary, and you cannot put it back into the business without withdrawing it..
Rather than viewing them as competing options, it’s about understanding what each is designed to do and considering what may be appropriate for your own circumstances.
The Simple One: Keep an Emergency Fund
Not every part of financial planning needs to be complicated. One of the simplest points raised in our conversation was the importance of having accessible cash available for unexpected costs.
Running a business can come with uncertainty, and life outside of work can be unpredictable too. An unexpected repair, a change in income or an unforeseen expense can have a significant impact if all of your money is tied up elsewhere. That’s why having a cash buffer can be worth considering.
Accessibility matters too. While some savings accounts may offer higher interest rates in return for locking money away, an emergency fund generally serves a different purpose: being there when you need it.
Understanding the difference between money you may need immediately and savings you can afford to put away for longer can be a useful part of wider financial planning.
Your Business Isn’t Your Entire Financial Plan
For entrepreneurs, it can be easy to see the business itself as the financial plan.
You’re investing your time, money and energy into building something that you hope will become increasingly valuable. But your personal finances and your business finances don’t always have the same needs or timescales.
Understanding areas such as salary and dividends, pension contributions, ISAs and accessible savings can help you ask better questions about what your financial future could look like beyond the business. And you don’t have to work everything out alone.
Through our partnership with AJ Bell, Manchester Young Professionals is helping to make conversations around investing, pensions and financial planning easier to understand for our community.
Whether you’re running an established company, growing a side hustle or taking your first steps into entrepreneurship, learning more about your options can be a useful place to start.
Important Information
This content is provided for general educational and informational purposes only and should not be considered financial, investment or tax advice. The right approach will depend on individual circumstances. Tax rules can change, and their impact depends on personal circumstances. If you’re unsure about your options, consider speaking to a suitably qualified financial adviser or tax professional.
