One the many courses I’ve been on was about time management. It was interesting but, evidently, not particularly helpful. A question asked stood out: “What is the difference between urgent and important?” Anyway it turns out that urgent is what something important becomes when you fail to deal with it in time.
As a result, many family businesses have a lot of urgent issues. One that can become really urgent is that of the sudden demise or incapacity of the team member who is most responsible for your profits.
Picture your business running beautifully, orders are coming in at just the rate that they can be filled and invoices are being paid well in time to meet expenses. Most of this is due to ‘Jamie’ who is the best sales executive you’ve ever had. He has contacts built up over years of experience and manages to secure the most phenomenal orders; he just has a great way about him. On top of that everyone at the office loves him, his paperwork is great and he really fits into to your family business well. He’s better than the rest of your sales team put together. More than that, you’ve worked out that he’s responsible for over 60% of your £2,500,000 annual profit.
That’s why you pay him so well. You need to keep him. It’s important that you keep him. You just hope nothing happens to him.
One day you get a phone call that Jamie has tragically been killed in a car accident on the way to work. The whole business is in shock. Of course, your first thoughts are for his family and friends. Their loss is enormous.
Then it dawns on you about your loss. Jamie was responsible for £1,500,000 of your profit this year. What’s going to happen now? All of your projections for next year include Jamie’s business. Without his contacts and orders where will the business be, not just now but in the year to come? How are you to survive this as a firm? Layoffs? Bank loans? Cut backs? How long could this take to recover? It’s urgent we find a solution and fast.
Jamie was a key person in your business. Part of your capital – human capital. We are all happy to insure plant and machinery against loss, theft or breakdown – it’s important. However, few of us think of the importance of insuring our human capital against their loss.
Having your business take out a Key Person Plan to cover the loss of profits and cost of employing a new person to replace Jamie, or your key employee, could make the difference between your family business surviving or going under.
It’s easy and relatively inexpensive (especially compared to the alternative) and could be tax effective, which you should discuss with your accountant. It’s important to do early, before the situation becomes urgent.
TAX TIP 2
The Starting Rate Band
For this tax year (2015/16) the starting rate band for savings income was widened from £2,880 to £5,000 and the rate reduced from 10% to 0%. Very sadly, this only applies if your earnings and/or pension income are less than £15,600 in this tax year. So it won’t help most. However, if you do qualify, it’s important that you have the right type of investment to pay 0% tax.
If all of your income falls within the personal allowance plus the starting rate band, in 2015/16 you should be able to register to receive interest with no tax deducted at source. From 2016/17 you won’t even need to register as banks and building societies will start paying interest without deducting tax
The Personal Savings Allowance
If you pay tax at no more than the basic rate, the personal savings allowance will mean you can receive savings income of up to £1,000 tax free in 2016/17. If you pay higher rate tax then the allowance is £500. Either way this is a tax saving of £200 a year. Additional Rate tax Payers won’t get an allowance.
With such very low interest rates this probably means most people will have no tax to pay on their bank and building society accounts. To avoid HMRC being flooded with small tax reclaims, all interest will be paid gross from next year.
The combination of personal allowance, personal savings allowance and starting rate band will mean that in 2016/17 it will be possible to have an income of up to £16,800 before paying any tax. However, it has to be the right type of income, so planning is essential
March’s budget set the 2015/6 personal allowance at £10,600 and it is due to rise to £10,800 next year and £11,000 in 2017/18. If we believe the Conservative Party election manifesto we could see a Personal Allowance of £12,500 by April 2020.
Even now, many of us don’t use our personal allowances fully and there is still a gap o over £2,500 between it and the starting point for National Insurance contributions.
At the other end of the income scale there are some of us who have no personal allowance this year as our income exceeds the £121,200 threshold at which point the allowance is tapered to nil.
If you or your partner do not use the personal allowance, you could end up paying more tax than necessary. There are several ways to maximise use of your allowances.
• Choose the right investments: some investments do not allow you to reclaim tax paid while others are designed to give capital gain, not income.
• Couple should consider rebalancing investments so that so that each has enough income to cover their personal allowance.
• Make Sure in retirement you and your partner have enough pension income. The basic state pension (£115.95 a week in 2015/16) alone is not enough.
Next… The Starting Rate Tax Band
Whether you like opera singers, meercats or fancy yourself a macho husband, the drive is on to use the web to find the cheapest quotes on insurance.
For car insurance, I understand but Life Insurance – come on!! Surely you’re not going to base your family’s financial security on the cheapest quote. It has to be the right policy, doesn’t it? One that exactly meets your personal circumstances and is actually enough to keep your family if you’re gone.
How far will £100,000 go? What then?
Will your cheap policy be in trust? Why should it be?
Well, if you’re not sure maybe you shouldn’t be looking for on line life insurance quotes.
As I’ve said before, Financial Planning is not a DIY job.