Business Matters – Issue 12

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Inflation

The ins and outs

Self-employed?

Here’s how you can work towards a bright financial future

Budget balance 

Why you should bank on your employees’ financial well-being

New entrepreneurs

Your tax FAQs answered

Key shareholder departure

Plan your course of action today

Inflation: The ins and outs

As prices creep up now that the easing of lockdown restrictions is underway, what impact might this have on investors? Read on to find out exactly what inflation is, how the current situation looks, and what inflation means for savings.

As COVID-19 restrictions are easing all the more, and consumers are more mobile, meaning they’re spending their savings, ‘inflation’ has increasingly made the headlines in the financial news. Yet what’s the driving force behind this increase, and is it cause for concern? 

Inflation – what is it?

Simply put, inflation is the rate at which prices of goods and services are rising, and it results in money losing its purchasing power over time. In the UK, the Office for National Statistics (ONS) tracks inflation, collecting 180,000 prices of 700 items as part of a sample ‘basket of goods’, thereby measuring price changes as time goes on. These items range from clothing, footwear and food & drink, to transport and restaurants.

A certain level of inflation is expected by governments and central banks in order to help the economy grow. If prices are steadily increasing, people are encouraged to spend now as opposed to later, to avoid future price hikes. Furthermore, it enables companies to increase their prices and wages, in order to grow and pay down their debt.

Nevertheless, the impact of runaway inflation is no secret, in that it can wipe out purchasing power – if the value of a currency falls faster than people can spend their salary, this leads to tangible assets being hoarded – resulting in a ‘capital flight’, as people try to take their money out of the country to seek stability.

Central banks and governments therefore aim to maintain inflation at a low and reasonable level. In the UK, the US and many other developed economies, the target is 2%.

What’s the current situation?

The past year or so has witnessed a significant economic slump, with supply chains severely disrupted and many consumers obliged to stay at home – often saving their money as a result. At the same time, governments added liquidity to the system, thanks to low interest rates and various loans and payments to companies and individuals.

Now the heat of the pandemic has cooled off, consumers have returned, and they’re keen to flash the cash. On the other hand, in some cases, supply chains have not recovered as quickly, meaning prices have taken an upsurge. Take cars, for example – demand for used cars has vastly increased as the lockdown has eased, with the stock of used cars remaining low, which has led to increasing prices.

Inflation is usually reported by way of comparison to the previous 12 months, and so inflation for Q2 2021 is compared to Q2 2020 – when prices were quelled by the first lockdown, and oil prices had crashed following an OPEC stand-off.

All this has meant an increase in inflation throughout much of the Western world.

One way that inflation can be controlled is by raising interest rates. Increasing the cost of borrowing results in consumers and businesses having less to spend, meaning that the amount by which businesses can increase the costs of their products is also reduced. What’s more, higher interest rates make saving cash a more appealing solution, too.

At the moment, rates are at an all-time low, hovering slightly above 0% in many Western economies. Given that inflation is inching above the 2% target, some investors are predicting a rate rise in the future. For the time-being, however, the Bank of England and the US federal government see the current inflationary trends as “transitory” – and are therefore unlikely to make any snap decisions.

What does inflation mean for savings? 

Higher inflation means your money needs to work harder for you, so you don’t lose that precious purchasing power. Due to low interest rates, increasing inflation may be problematic for individuals with large amounts in cash, as long as interest rates remain below inflation. Nevertheless, cash may still have a role to play in a portfolio, thanks to its flexibility, liquidity and security.

Inflation isn’t necessarily a negative for those with investments in equities, however. On the one hand, it does mean you need your money to work that bit harder and earn fractionally higher returns to generate a return above inflation. And for some companies, it might reduce profits if they’re unable to share these price increases with their customers.

On the other hand, it’s often the case that higher inflation helps to boost a company’s debt situation, with many companies being able to pass on increased costs direct to the consumer – for instance, in mobile phones, insurance and utilities.

This is just one reason behind the importance of diversification. It’s unrealistic to think that one sector could outperform other sectors for ever, and as inflation increases, some investments may perform better, whereas others may need some adjustment.

What’s also noteworthy is that inflation is no newcomer. It’s constantly in the background, and fund managers have always accounted for it in their strategies. Furthermore, it’s just one in a matrix of considerations fund managers keep track of and respond to over the long term.

At Wellesley, our clients have access to a wide range of investment solutions. By investing in a range of assets and companies, potential protection against the harmful effects of inflation over the longer term is available.

As always, the Wellesley team are here to alleviate any financial concerns you may have – to learn more about inflation and how your investments can be positioned for the future, don’t hesitate to contact your financial adviser today on 01444 244551.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise. You may get back less than you invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society, as the value & income may fall as well as rise.

Self-employed? Here’s how you can work towards a bright financial future

With an uncertain workflow, fluctuating finances and a lack of employer pension contributions, it can be hard to make retirement plans when you’re self-employed. Yet the flipside means it offers many benefits, too. We take a closer look.

In no uncertain terms 

The flexibility that comes with self-employment comes with an uncertain income and no employer pension contributions, but it does offer its own advantages, too.

There is little option for those who are self-employed but to either engage or risk falling behind when it comes to long-term finances and retirement planning. Benefits await amidst the many challenges – particularly considering the impact of the coronavirus crisis on many businesses.

Research by the Financial Conduct Authority showed that seven in 10 suffered a fall in business revenues in the six months from March 2020, and 9% ceased trading entirely.1 Inevitably, these circumstances will affect retirement plans, an area in which the self-employed are already at a disadvantage. According to the Financial Conduct Authority, they are some of the least likely to be contributing to a pension, with just 55% building a pension pot compared with 80% of all working adults.2

All uphill? 

Many reasons can explain this discrepancy. The self-employed, for example, are excluded from the automatic enrolment of a pension scheme – since its introduction in 2012, millions of workers have been placed into workplace pension schemes to help them plan for retirement.

While the number of those in the UK choosing to become self-employed has risen significantly in recent decades – from 8% in 1975 to more than 14% in 20193 – there has been nothing to change the pension challenges that accompany the freedom.

The unpredictability of income that often goes hand in hand with self-employment is also a major factor in this, notes Tony Clark, Senior Propositions Manager at St. James’s Place.

“An erratic income stream, with good periods and not-so-good periods, is an issue. It’s harder to plan ahead and know how much you can pay into your pension.”

Another factor has to do with the fact that self-employed people need to keep on top of both their personal and business finances at the same time. The time and hassle of this is big, even without adding the setting up and maintenance of a pension and long-term savings plan to the list.

But without a workplace pension scheme to rely upon, it falls to self-employed people to be proactive when it comes to ensuring they put enough aside for later life. “The employed are being nudged into saving more, whereas that doesn’t happen for the self-employed, so it’s about being savvy and active in how you plan,” says Clark.

Stacking the odds 

It can feel like an uphill battle when you’re self-employed, but the flexible nature of this kind of employment fits in well with modern retirement.

Clark continues:

“Most people approaching retirement in the next 10 or 20 years will need to draw on a range of assets, not just their pension. The self-employed have the opportunity to be a bit ahead of the curve in that respect.”

While pensions are important, for example, there is a wider retirement savings package that should be considered. Individual savings accounts (ISAs), personal pensions, self-invested personal pensions (SIPPs), property and business assets can all provide retirement income, as well as offering additional diversification and investment flexibility.

“It’s about building retirement assets, and your pension is just one of them,” says Clark. “Having a plan in place can help you take full advantage of the flexibility that often comes with being self-employed.”

Your plan should involve what works best for you, such as making pension or investment contributions that fit with earnings levels that often jump up and down. You may, for example, find it easier to pay in lump sums every few months instead of contributing a set monthly amount.

And because of the way pension allowances work, uneven or irregular incomes can even work in your favour – annual allowance rules set a limit to the amount you can pay in each year, but also offer a ‘carry-forward’ feature, meaning you can use any unused allowances from the previous three tax years to maximise your pension contributions in the current tac year. It also means you still could benefit from your allowance even if you don’t use all of it this year.

“You can balance out how much you contribute to your pension, depending on if your business is experiencing good years or tough times, and really take advantage of those tax allowances,” says Clark.

Teamwork 

It might come down to letting a professional ease some of the burden to make sure you’re getting the most out of the flexibility of self-employment and maximising allowances.

Clark explains:

“If you haven’t used all of your allowance, an adviser can look at the past few years and see what you can do with it. It’s like a jigsaw puzzle, whereas when you’re employed, it’s easier to just let your pension do the work.”

An adviser can be crucial in understanding how you can make contributions that fit with your work and earnings patterns.

Clark concludes:

“Retirement and pension planning will often fall down the list when you’ve got a lot to do, so it’s important to ensure you’re not in it alone. Use a financial adviser, because trying to do everything yourself can be really hard when you’re self-employed.”

Self-employed and need help planning for retirement? Speak to a Wellesley adviser today.

The value of an investment with Wellesley Wealth Advisory will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependant on individual circumstances.

Sources:

1,2 Financial Lives 2020 survey: the impact of coronavirus, Financial Conduct Authority, 11 February 2021, 16,000+ survey respondents.

3 What does the rise of self-employment tell us about the UK labour market?, briefing note, Institute for Fiscal Studies, 19 November 2020

 

Budget balance: Why you should bank on your employees’ financial well-being

Putting financial well-being in your budget for next year won’t just promote a happier workforce – it might also be good for your bottom line. Here’s why!

In our last issue of Business Matters, we discussed why employers have a golden opportunity to champion their employees’ financial well-being, and the ways in which they can do so. For this issue we wanted to dig a little deeper into why exactly it pays to invest in your employees’ financial health.

It’s true – a company’s biggest asset is its workforce, and any savvy business owner would surely jump at the opportunity to boost their productivity? While investing in employees can be hard to translate into more tangible terms (e.g. a training course vs. commercial value), when it comes to their well-being, it’s not just common sense – it’s business sense too!

But, with almost nine in 10 larger UK businesses saying they have been impacted by poor employee financial well-being1, and investors now eyeing up companies’ employee well-being, it’s clear that now’s the time for business owners to act!

Counting the cost

With the majority of your employees spending most of their time at work, it stands to reason that any personal troubles might seep into the working day – potentially impacting performance or even attendance. It’s therefore likely that at any given time, at least some employees will be affected by stress and mental-health issues. In fact, it’s estimated that the problem could cost the UK economy more than £4 billion every year.2

Harriet Shepherd, Workplace Financial Education Project Manager at St. James’s Place Wealth Management, explains:

“Employee well-being is a big root cause of how productivity changes. If you have a lot of stress, productivity goes down, morale goes down, and time and brainpower are affected. Using parts of your day to deal with issues such as financial problems will have an impact on your productivity and your capacity to think about other things.

“It’s completely understandable, but it has a business impact too, so it’s beneficial for everyone for those instances to be reduced and for people to feel supported.”

Building confidence

The relationship between financial difficulties and mental-health issues is well established, but COVID-19 provided a clear illustration of the link, with those who experienced sudden and significant drops in household income during the crisis suffered the sharpest increases in mental illness.Even pre-pandemic, research showed that 94% of UK employees in 2019 had money worries, with three-quarters reporting that those concerns affected their work.4

Financial well-being is a key element of supporting your team’s mental well-being – after all, financial worries can affect anyone. It isn’t just about how much money you have, but also about how secure, confident and empowered you feel financially, according to the Money and Pensions Service.

Think about ways that you can offer your employees emotional and practical support to help boost their financial confidence and well-being. In some cases, it will begin with financial education and equipping people with the tools to manage their finances effectively. This means improving people’s day-to-day confidence and resilience as well as addressing their future.

Keeping up appearances

What’s more, employee well-being is no longer just an internal issue. It forms part of a company’s environmental, social and governance (ESG) considerations. The ‘S’ component of ESG covers the relationships that companies have with employees, customers, suppliers and the wider community.

While the ‘employee’ aspect can be easy to overlook, the COVID-19 pandemic saw employee well-being climb the list of issues that investors look at in companies from an ESG perspective.5 This means that companies are now being held more to account socially for employee well-being, so you need to be aware of that and be able to show what you’re doing to support your team.

Reaping the benefits

You may also wish to consider partnering with a financial organisation to help you communicate your existing reward packages – such as pension contributions – more effectively. As Shepherd points out, employees often need support when making decisions about those opportunities:

“It’s really important to help people translate what the different arrangements can mean for them. You only need to look at the number of people still in the default fund of their pension plan. While it will be right for some, more often it indicates that they haven’t engaged with their pension or even their wider benefits package, suggesting perhaps that they need support in doing so.”

Financial education is about equipping people with the ability to make informed choices and giving them the information they need in order to feel more confident. Shepherd concludes:

“If you have someone there supporting you and talking you through the financial implications of what they’re doing, even just having that peace of mind is reassuring. You worry less when you have someone in your corner.”

Common sense = business sense

So, investing in your employees isn’t just an all-round good thing to do, but positive for the bottom line too – increased employee happiness should therefore boost productivity and attendance.

If you’re interested in a Wellesley adviser coming into your workplace for a finance guidance session, contact us today!

Sources:

1,4 25 million UK employees affected by money worries while at work, Close Brothers, March 2019 (Based on a survey sample size of more than 5,000 employees and more than 1,000 employers)
2 Employee wellbeing: the changing dynamics of financial health, LCP, 2021 (Based on a survey sample size of 10,000)
3 Finances and mental health during the COVID-19 pandemic, NatCen, April 2021
5 Workplace wellness and employee mental health – an emerging investor priority, Harvard Law School Forum on Corporate Governance, December 2020

New entrepreneurs: Your tax FAQs answered

Saving money on taxes should be a priority for all entrepreneurs, especially if you’re just starting out. After all, you won’t reap the financial rewards if you don’t know what you legally can and cannot do!

That’s where seeking advice on business tax comes into its own, as it can save you time, hassle and money – and there’s no time like the present to get started.

A whole new world

Dealing with tax can be time-consuming and often perplexing – particularly if you’re new to the world of being an entrepreneur.

Tony Wickenden, Managing Director of Technical Connection and Technical Director at St. James’s Place, remarks:

“Your focus as a businessperson should be on the great idea you have to start a business – it shouldn’t be on doing all the administration as well. Taking sound financial advice is absolutely essential, so you don’t become distracted by stuff that isn’t necessarily natural to you. It will cost you a bit of money to outsource it, but ultimately it usually turns out to be the right thing to do. Keeping the main thing the main thing, so to speak.”

What is the most tax-efficient way to pay yourself, and how do you develop the best tax plan? While these issues might not seem like they need to be prioritised, you can save time, hassle and – most importantly – money, by thinking about them right from the outset.

For first-time entrepreneurs who have swapped their corporate life to pursue their own business, it’s also wise to take out life insurance and income protection, says Wickenden.

“Especially coming out of a corporate environment, where you may have had pensions, life insurance and health insurance provided for you, putting ‘replacement cover’ in place yourself brings all-important peace of mind.”

Crawfurd Walker, Chief Revenue Officer at Elephants Child, remarks that seeking advice can pay for itself by making sure that business owners fully utilise any tax reliefs or incentives that may be available.

“For example, R&D Tax Credits are often overlooked, but can be a welcome addition to an entrepreneur’s cashflow.”

Walker continues, noting that there’s no time like the present to start thinking about maximising tax efficiency when selling the business.

“Having built value, the entrepreneur will want to be able to extract this as tax-efficiently as possible, and this needs to be considered well in advance of any potential sale or partial exit. This should include both the business and personal elements. Concentrating only on the business and neglecting personal affairs could result in significant sums being lost in Inheritance Tax, so planning should include wills and, where appropriate, trusts.”*

Tax FAQs

Kerry McCreadie, Head of Owner Managed Business at UHY Hacker Young, discloses the taxes you’ll need to have on your radar when starting your business.

Income Tax: The individual setting up the business will be subject to Income Tax, more or less regardless of the selected business structure, paying based on profits in a sole trade or partnership model, and paying it on their salary or dividends if a company structure is used.

National Insurance: Class 2 and class 4 NI will be paid by sole traders and partnerships through a year-end tax return. Individuals using a corporate model will pay class 1 on salary payments. Dividends do not suffer NI whatsoever. Being well-advised means you can ensure sufficient earnings over the NI threshold are registered each year to build future state-pension entitlement.

Corporation Tax: This tax is only applicable to companies and is payable through a year-end Corporation Tax return. The current rate for the majority of companies is 19% of taxable profits (2021/22 tax year).

VAT: This is compulsory for individuals with turnover above the registration threshold (currently £85,000). However, some businesses will opt to voluntarily register from the start, particularly where the customers of the business are other VAT-registered entities.

Enterprise Investment Scheme and Seed Enterprise Investment Scheme (EIS and SEIS): These are tax reliefs rather than taxes, yet where businesses plan to raise capital from external investors, they will be much more appealing if those investors are set to benefit from these generous reliefs.

Budget 2021: Tax exemptions and allowances checklist

Here are the key tax changes for entrepreneurs, as announced in the 2021 Budget:

Income Tax: The personal allowance has risen to £12,570. Likewise, the higher-rate threshold – the point at which you will begin to pay 40% Income Tax – has increased fractionally to £37,701 of taxable income or £50,271 of gross income in 2021/22.

Dividends: The dividend allowance remains unchanged, at £2,000.

Personal pensions: There were no changes to personal pension tax relief, and so most people can still get relief on pension contributions worth up to £40,000 a year. The lifetime allowance likewise remains unchanged, at £1,073,100 for 2021/22.

Capital gains tax: The capital gains tax annual exempt amount will remain at £12,300 until 2026.

Inheritance tax: The Inheritance tax nil-rate band for 2021/22 remains at £325,000 and will be frozen until 2026. The residence nil-rate band stays at £175,000.

Here at Wellesley, we regularly keep in touch with our clients to discuss tax and other areas where we believe you, and your business, can save money. If you’re an entrepreneur who’s looking to get the most out of your business, contact us on 01444 244551 and we’ll be happy to help in any way that we can.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

*Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place and along with Trusts are not regulated by the Financial Conduct Authority.

 

Key shareholder departure: Plan your course of action today

Whether it’s due to resignation, retirement, death or incapacity, key shareholders may depart at any given moment, for a host of reasons. Prompt planning for a range of such scenarios is critical to minimise the impact across the business – read on to learn more.

The situation sometimes arises where the shareholding structure of an SME owner’s business has to change. While this might be fully expected – due to a well-flagged retirement – it could equally come as something of a surprise – because of a resignation, sudden death or incapacity.

As always, getting ahead of the curve and being prepared for a range of such situations is critical for the least possible disruption. Simon Martin, Tax and Trust Consultant at St. James’s Place, says:

“Operational, legal and financial plans will all be needed, and spell out: who will take over the day-to-day functions of a departing shareholder; who will purchase their shares; and how the purchase will be financed?”

Resignation or retirement

While ideal, it’s not always the case that co-shareholders will be able to exit together, as would be the case if a business were to be sold lock, stock, and barrel. A shareholder may choose to resign for any number of reasons, or retire earlier than fellow shareholders.

Richard Jones, Corporate and Commercial Partner at law firm Blake Morgan, remarks that considering how the operational role of any individual shareholder would be covered were they to leave is not only about ensuring that day-to-day operations continue running smoothly, but also planning for the scenario where you might have to allocate equity to high-calibre replacements.

When it comes to legal planning, he highlights the importance of shareholders agreeing ahead of time that if one of them departs, that person is duty-bound to sell to non-departing shareholders – this can be covered in the main shareholders’ agreement or in a separate agreement. A separate agreement would be required if not all shareholders (for example, staff with very small stakes) are party to this arrangement. In order to avoid disputes at the time of the transaction, it would be wise to also agree on a methodology for valuing the shares – from the outset.

As regards financing the purchase, Richard comments that this is generally done through the company, and is usually not a case of non-departing shareholders having to source the cash in their personal capacity. Instead, it might be that the company pays for the leaver’s shares out of accumulated profits, or perhaps by raising debt or equity finance. The company would subsequently purchase the shares and follow a legal process of ‘cancelling’ those shares – with all shareholders raising their stakes proportionately.

He also draws attention to the fact that it is quite uncommon for a departing shareholder to receive all of their cash immediately. In fact, there would usually be an element of deferred payment (known as vendor financing), thereby easing the financial burden placed on the company.

Death or incapacity

In the case of the sudden death or incapacity of a shareholder, this is understandably more difficult to deal with from an operational point of view. However, contingency planning should be actioned on a regular basis to limit the impact on the day-to-day running of the business in this instance.

On the other hand, notes Simon:

“Dealing with the transfer of shares from a deceased or incapacitated shareholder should be a fairly straightforward process, if the correct legal and financing structures are put in place in advance. The legal side is usually covered by a ‘double-option agreement’, also known as a ‘cross-option agreement’, and the purchase is usually financed from the proceeds of a protection (life and disability) insurance policy.”

Richard explains:

“A cross-option agreement is essentially an irrevocable guarantee that, in the event of the death or disability of a shareholder, the insurance will trigger and the surviving shareholders undertake to purchase the shares of the deceased for the amount paid out by the insurance policy.”

He advises that shareholders revisit the value of the business periodically – updating the policy as necessary. If this isn’t actioned and the policies pay out less than the value of the shares, the deceased’s beneficiaries won’t realise the full value of the shareholding. He flags that it’s possible to structure the agreement in such a way that the company can bear the cost of the insurance premium.

The repercussions of neglecting to think through the implications of a change in shareholding, and failing to put these legal and financing structures in place upfront, can be truly terrible.

Richard says:

“The operational implications of losing a key member of the team will inevitably put some strain on the business. But if the transfer of shares isn’t sorted out properly, things can get infinitely worse. Without the correct legal agreements, the shares of the deceased can end up in the hands of someone who has never had anything to do with the business (a beneficiary of the deceased’s estate) but has all the controls and rights that were afforded to the deceased – such as putting people on the board and influencing the direction of the company.”

He goes on to point out that the deceased’s beneficiaries might be free to sell their inherited stake to an unwanted shareholder – for example, as a competitor.

A final point highlighted by Simon relates to tax:

“The legal and financial structures need to take into account the tax circumstances of all parties, and ensure that, where possible, no unnecessary taxes are payable (as would be the case if insurance premiums paid by the company are deemed a ‘benefit-in-kind’) and no tax reliefs are lost (such as Business Asset Disposal Relief, previously Entrepreneurs’ Relief, and Business Relief).”

Readers should seek appropriate legal, financial and tax advice when considering the structures mentioned in this article.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.