Entrepreneurs: how we grow and secure personal wealth to protect future finances

In the early stages of a new business venture, we often find that entrepreneurs are so focused on building and growing their new brand, that they neglect their personal finances.

Here one of Clarion’s Chartered Financial Planner’s – Jacob Hartley – talks through how as a company we work with many young entrepreneurs and take on the role of what we often refer to as a ‘Personal Finance Director’.

By taking on the role of ‘Personal Finance Director’, it allows entrepreneurs to spend their time and energy focusing on their passion – their business. They have the confidence of knowing that an expert is working alongside them to help grow and protect their personal wealth with a view of securing their financial future.

It is common for business owners to have a clear vision on the direction they want the business to go, however we find that they rarely give much thought to their personal goals and objectives. Here at Clarion, we have meaningful conversations with our clients to identify the key components of what is important to them in life, aside from the business, in order to seek out exactly what they set out to achieve. As part of this process, we create robust Lifelong Financial Plans for our clients, which helps identify what personal wealth needs to be created from the business venture, in order for them to achieve the things they want in life, both now and in the future.

It is often the case that entrepreneurs only start to engage with a Financial Planner at the point the business is starting to become a success, by which point they are often in a cash rich position. It will often take years to get to this point, during which time no personal planning has been carried out. This results in valuable annual tax allowances not being utilised and ultimately the opportunity for tax efficient investment growth being lost along the way.

One valuable allowance that often goes unused is the annual pension allowance. In the 2022/23 tax year, this allowance stands at £40,000 per person (reducing for higher earners). It is also possible to carry forward unused allowances from the previous three tax years, which could present an opportunity for a business owner who hasn’t contributed into a pension for over three tax years to contribute up to £160,000.

Company pension contributions are a very tax-efficient way for business owners to extract money directly from the business into their personal name. Pension contributions are made from pre-taxed company income and are classed as an ‘allowable business expense’. As such, contributions will essentially reduce the company profits in that year, resulting in a corporation tax saving. The current rate of corporation tax is 19%, which based on an employer pension contribution of £40,000, will result in a corporation tax saving of £7,600.

As earnings increase, the potential to contribute to pensions may decrease, subject to the Tapered Annual Allowance rules. As such, taking advantage of your available pension allowances whilst earnings do not exceed the relevant thresholds is a valuable way to extract money tax-efficiently into your personal name, providing a good foundation to increasing your personal wealth and securing your financial future.

The potential loss of valuable tax allowances emphasises the importance of engaging with a Financial Planner early on. Here at Clarion, we have years of experience dealing with a range of business owners at all different stages, helping them achieve success both via the business and personally.

The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.

Tax planning and trusts are not regulated by the Financial Conduct Authority.