Getting your finance strategy right will help you attract the talent you need, keep them longer and make them happier …
… a bold claim. I’ll be honest with you – my wife works in recruitment marketing and laughed out aloud when I made it. I convinced her, so I must be onto something.
Using your agility to maximise tax free employee benefits
Take advantage of the fact you’re small and agile. There’s a bunch of nice things you can do for your employees that, structured correctly, save you tax and don’t mean extra tax for them.
These are things you should be doing anyway, but the tax saving make it all the sweeter.
Maximising the effect of your workplace pension scheme
A bigger win comes from using your workplace pension scheme smartly. Workplace pensions will always save you and your employees tax. However there are big differences in how tax efficient you can be.
If you don’t optimise how you’ve set the scheme up, you could be missing out on an extra 25.8% that could be going into your valued employee’s pension at no cost to you or them.
The big one, share based payments:
These are very well known in the tech start-up and scale-up space, but more of a mystery to other owner managed business. If you’re not familiar with them:
What is share based payment?
It means giving employees a small shareholding in your business as well as their normal salary. Normally this is done by giving them share options that are linked to them meeting certain goals (e.g. over the next year). You can either give them the shares for free, or allow them to buy them (normally at a discounted price).
Why would I do this?
It’s normally done either instead of, or as an extra boost to, a cash bonus. So you use them to reward high performing staff:
- The obvious benefit is that it saves you money ?.
- But there’s more to it than this – the option structure encourages your key employees to stick with you (if they don’t the share options are worthless). Even once the options have “vested” (so they get given / can buy the discounted shares) they still want to stick around as they’re now part owners of your business.
- It motivates and aligns your best employees to your goals as the business owner.
- It does all of this very tax efficiently.
Giving away part of my business sounds scary
It’s right to be cautious, but if things are structured correctly any risks can be managed.
- The number of shares you use is kept small, so even if all your key employees meet their targets there’s no risk of you losing control of your business.
- The schemes are structured so that even if your relationships soured in the future, your past employees can’t get in your way. For example, you put conditions in place so that they can’t prevent you from selling your business by refusing to sell their shares.
Won’t this be more expensive than paying them, if my business takes off?
The short answer is yes, it may well be. The smart answer is that you’re better off with a slightly smaller share of a much bigger pie.
- The benefits (in terms of increased motivation and alignment) could well be the thing that helps your business take off.
- It’s better to get 90% of a £1m per year dividend than 100% of a £100k per year dividend.
- A well structured share scheme acts as a pair of “golden handcuffs” that keeps vital staff within your business. This actually makes your business more attractive to investors so they’ll pay more to buy your shares.
I don’t have employees but I do use subcontractors, does this work for them too?
Yes and no:
- Yes – if you have long term subcontractors, then giving them share options will have a similar impact as it would for employees. There are technical differences in how you’d structure things though, and it takes a lot more expertise to get meaningful tax benefits.
- No – if you’re using subcontractors on a short term basis then this may not be strategically optimal. It could be better to set up a joint venture or similar structure, where you both share equity in the JV, while you each retain ownership of your own businesses.
I help tech entrepreneurs build more profitable and strategic businesses so they can scale smarter | Virtual CFO and Founder of Oxwich Accountancy