Running a business
This section of our site is for businesses and employers and provides information on topics such as staff benefit packages, key man insurance, directors’ pensions and debt financing.
Staff benefit packages
Offering benefits to your staff often helps to maximise the value-for-money opportunities in your staffing costs.
Consideration should be given to a cost benefit analysis of the various options for your particular set of employees.
In many cases your employees will perceive the value of the benefit to be much higher than the actual cost of providing it, which makes such benefits a very useful tool in remuneration negotiations with either individual staff or groups/unions and in general staff retention.
The benefits not only accrue to your staff, but also assist in the efficient management of the company by providing cover for certain risks. For example:-
- Income protection
When you have to let a valued staff member go because of ill health it can be a very difficult decision, almost as stressful for a manager who feels that he is condemning a friend to State Benefits, as it is for the ill employee. If, however, the staff member has got income protection as part of their package, everyone knows that their salary will be largely replaced by income from the insurer. This makes for much better management.
- Critical illness insurance
If one of your staff gets a serious listed illness (but not necessarily immediately fatal, listed illness e.g. some forms of cancer, some forms of heart attack, stroke), then they get a lump sum payment (typically equal to two years salary). Again it helps to resolve the issues inherent in either paying unproductive staff or letting people down when you would really like to help them.
- Medical insurance
The NHS is not as good as we would like at dealing with non-urgent, though painful and disabling, conditions. The fact that your employees’ productivity is impaired during the waiting period is of no concern to the NHS managers. If your employees have private medical cover they can get these problems dealt with much faster and thus return to full productivity without delay. This is of course to the benefit of the firm.
With the introduction of auto-enrolment, every employer with at least one member of staff has to enrol all eligible workers in a qualifying pension scheme and pay minimum contributions. Some employers choose to contribute more than the legal minimum.
- Life insurances
Setting up a group life insurance (usually as part of a pension) can be a good idea, and if you have valuable staff with health problems, possibly a way to give them insurance that they could not otherwise buy.
Key man risks
As a company you insure your cars and your equipment against disaster like fire and flood, and include compensation for loss of profits as well as asset replacement.
Do you insure your company’s cash flow against the loss of key members of staff?
Draw up a list of your key people who, very broadly, are those whose skills are such that no one else could easily or readily replace them should they die suddenly.
In most companies the directors are key people, as are the top salesmen, business drivers, and possibly certain technical staff.
Ask yourself what sort of damage their loss would entail. This can range from the catastrophic (for example in the event of the death of an owner director this can result in the calling in of all debts, bank overdrafts etc and subsequent failure of the firm) to the difficult (such as the death of the top salesman may cause a new business shortfall and subsequent cash flow difficulties) to the merely expensively inconvenient (e.g. hiring a consultant locum at £500 a day for several months while a new person is recruited).
If you consider that you have a potential problem then you can insure against it using key person policies.
We can help conduct an audit for you and assess what sort of coverage you might need.
Provided that the company produces more than enough profits to meet the income needs of the owners, the disposal of the surplus is largely a matter of tax planning.
In brief, it is possible to reduce your corporation tax, income tax and even national insurance liability by careful use of pensions. At the same time you can create a private fund that can lend money to the company (as a very attractive alternative to banks, and in which all your interest payments go straight back into your pension fund), buy corporate property, and even be used to smooth the transfer of the company from the older to the younger generation.
The actual detail as to what can be done for your own company and objectives depends on many factors, including the ages of the controlling directors, their individual aims, their existing pension arrangements and the resources available to build the fund.
The first rule of debt is, provided that you are a good risk, you may get your rate reduced. On most corporate debt this can produce instant savings of thousands of pounds a year.
If any of the following strike a chord, then you may well have scope to reduce payments, either by moving the debt, or pressuring your bank into being more realistic as to what level of interest is truly fair for a good reliable client such as yourself.
This is de facto long-term debt and should be priced as such.
Is it really unsecured? What would happen if you defaulted? Are personal or corporate assets actually at risk? If so, then why pay the higher rate of interest?
If you have given them, then your own assets (eg your home) are at risk, and your interest rate should be closer to that for a domestic mortgage than commercial rate.
Loans secured on commercial property or other assets
This is fine unless there should be a problem, when your house could be at risk. If this is the case then you may be paying over the odds for the borrowing.
Debts whose charging and interest rate structure was set up when the firm was going through a difficult period
If the company is now much stronger, explore refinancing at rates that represent the new low risk profile of the business.
Changing debt structures
The treatment of any particular company will vary according to the nature of the company and its debt structure.
That said, in most private firms a detailed assessment often shows that the owner’s house is at risk, even if this is not explicitly the case. There is often therefore much to be gained by recognising this reality and converting highly-charged debt into a domestic mortgage. This allows you to benefit from the excellent rates and deals available.
Where this route is not viable, but the company does own commercial property, then significant savings can still be made where there is highly-charged debt (e.g. overdrafts) which may be converted to commercial mortgages.
Simply suggesting to your bank that you might move your account can often produce useful savings. Converting overdrafts to mortgages can be cost-effective at surprisingly low levels, and for larger cases the savings can be very significant indeed. In extreme cases several percentage points may be shaved off the overall interest rate.
This information is intended for general guidance only and advice relating to any of these areas should be sought.
Your home may be repossessed if you do not keep up repayments on your mortgage or other debt secured on it.
The shareholder/directors in limited companies – and, indeed, members of partnerships – often need protection against the impact that the death of one of the shareholder/directors or partners might have on the financial viability of a business.
In general, most small companies provide in their deeds or articles of association that, on the death of any one of the principals, the others will have the right to buy them out – usually at a pre-determined price, or on an agreed basis. This is logical, since those who have invested time, money and effort in a business will often be reluctant to see a fresh face – however well intentioned – moving in to replace a valued member of the team, simply through inheritance. New ideas can be a good thing, but not if they adversely impact on the status quo at a time when the company has enough hurdles to overcome, as the result of the unexpected loss of a key participant.
For this reason, shareholder/director or partners can arrange life assurance based on the amount that would have to be raised in order to ‘buy-out’ the deceased participant’s share in the business. In this way, the death of a principal will trigger payments adequate to meet the cost of buying the share of the business inherited by the former principal’s beneficiaries. This sort of arrangement will normally include all the partners or shareholder/directors, although in some cases older individuals may be left out, if there is an alternative strategy for business continuity, such as the introduction of another individual from within the business with ownership remaining unaltered.
Life assurance policies can either be written on a cross-life basis, where each principal takes out a policy on each of the others, or by each principal on his or her own life, for the benefit of the others, under trust.
It is most common to use level term assurance for this purpose, possibly with a conversion or extension option. However, there is some merit in considering increasing term assurance, since the value of the business is likely to rise with time and a degree of inflation proofing at outset could save time and effort later on.
Within the context of shareholder protection, it is also worth considering that key man insurance can protect the business – and thus the financial interests of the shareholders – in the event of the death or long-term incapacity of certain key employees. These key employees may include – but are certainly not restricted to – the shareholder/directors.
Other forms of shareholder protection might include covering directors’ loan accounts with life assurance, so that, on the death of a director, money is available to cover the company’s liability.
The future value of investment in a company or business is not guaranteed but may fluctuate and no decisions should be made relating to shareholder protection without seeking professional financial advice.