The financial considerations of setting up a business

You will find your personal and business finances become linked, and must discover how to pay yourself tax efficiently. Taking advice is key

A common theme during times of economic turmoil is a rush from frustrated entrepreneurs to leave the confines of corporate life to start their own business. In the aftermath of the 2008 financial crisis, a number of start-ups were founded that would go on to change the world, including Uber, WhatsApp and Deliveroo. There is now evidence to suggest the same rush of activity to launch businesses is taking place in the wake of the coronavirus outbreak. There were 772,000 new businesses formed in 2020, according to think tank the Centre for Entrepreneurs, a rise of 13.25% on 2019.1

If you started a business during the COVID-19 era, what are the main things you need to consider? One of the biggest differences between being an employee and running your own company is the way your personal and business finances become intertwined. For example, entrepreneurs will often use their own funds to launch their start-up and then take money back out to fund their personal goals.

Setting up in this way requires a change of attitude towards your finances, according to Richard Murray, our Chief Commercial Officer. “Your mindset about your personal income will need to change and you should start relating it directly to the profitability of the business,” he advises.

One relatively simple calculation to make is to work out how many clients or sales you need and at what margin to be able to make a living in the first instance, and then, as you grow, to turn the business into a successful enterprise.

SME owners who plan to extract profits from their business via dividends should always remember that the tax on these earnings is owed by the individual and must be paid at the end of each year. “In effect, the money coming out to you is gross, not net, of tax,” says Richard. “Make sure that you are saving enough of that income to pay the tax when it becomes due and do not be tempted to dip into the money that you have put aside. Playing catch-up in later months is a very dangerous game and HMRC rarely takes prisoners!”

It is even more important to remember the tax rules on dividends following recently announced plans by the government to increase dividend tax by 1.25 percentage points from April 2022. There remains a tax-free dividend allowance of up to £2,000. The increased levy on dividend payments were revealed as part of a package of tax hikes to pay for spending on the NHS and social care, which also included an increase of 1.25 percentage points on National Insurance. The latter does not apply to those paying themselves through dividends but does apply to entrepreneurs who take salaries from their business, or sole traders in their year-end tax return.

When thinking about how to align your business and personal finances, it is important to strike a balance between immediate needs, such as paying bills, and long-term planning. Taking out life insurance or income protection is relatively cheap and can provide peace of mind should your business take an unexpected downturn.

Paying into a pension is a tax-efficient way to extract funds from your business, as well as being an essential part of planning for the future. A common mistake among entrepreneurs is to believe that selling their business will provide enough funds for a lengthy retirement. “With a 100-year life the target for many, that pension provision will need to last and you cannot wager your future on the belief that the business will sell for millions, as many don’t,” says Richard.

Anyone who leaves a corporate job to start their own business believes in their ability to succeed. To do that, especially in the early stages, will require you to focus on core requirements, such as developing your concept, finding customers and potentially hiring staff. With so much to do, it can be tempting to rush decisions on your personal finances, or put them off all together. This is something many entrepreneurs come to regret later in life, which is why seeking advice from a professional can prevent problems from developing.

“Trying to do it all yourself to make a short-term saving will mean you probably won’t achieve your goals and you’ll be forever running around,” says Tony Wickenden, Managing Director of Technical Connection and Executive Director, St. James’s Place. “It won’t be good for your social life, your family life or your health.”

Taking advice on the most efficient way to plan your personal and business finances can make a big difference. This is where St. James’s Place and Elephants Child can come in, with their experienced teams of advisers ready to work with you to produce a personalised plan for the future.

This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.


The CFE Business Startup Index, Centre for Entrepreneurs, 12 January 2021.