Organise Your Finances the More Efficient Way

Dear Client,

I hope you had a great week.

Last time I was in your inbox, we went through how you can discover your ability to create wealth. This week, I picked out a topic that I hope will help you get through the tax season without any hitches.

Do you sometimes look through your books and wonder how to put all your finances in order before the tax man rolls in? Do you find it hard to sit down to spreadsheets to organize your finances? If you do not have a problem organizing your finances, then congratulations, I’ll just be helping you do it more efficiently. However, if you are like many entrepreneurs I know who think of bookkeeping as a chore, then you can thank me later for showing you that bookkeeping does not have to be expensive, exhaustive or time-consuming.

Below, I will take you three steps to help you organize your finances the more efficient way

Step 1: Embrace Technology

There are numerous applications and technologies available today that are dedicated to helping you manage your finances. For instance, you can switch from manual data entry to simply scanning receipts to track expenditure by using Receipt Bank? Or that cloud computing services such as Xero Accounting can feed your bank statements into your accounting system so that you do not have to? Those systems nowadays cost as little as £20 per month, and they are designed to make your life easier. All you have to do is take advantage of them.

Step 2: Seek Help In Cost-Effective Ways

As an entrepreneur, having others help you will save you time, money and energy as you organize your finances. An easy way to get help is to have your spouse or children to handle the admin and bookkeeping tasks, so that you focus on building the business. You can pay them a salary that do not trigger much tax burden, and help reduce tax for you business the same time.  However, if you are solo, you can also now outsource bookkeeping in affordable way by hiring an accountant in India (or somewhere else in the world). Make sure you do try those freelancers first before you commit, so that you have the reliable person work for you. Also do consider protecting your data by having proper system and Non-disclosure Agreement.

Step 3: How and when to hire the right accountant for your business

Sometimes you have to spend money to save money. Hiring an accountant is an efficient way to organize your finances because a) you won’t have to worry about doing it yourself b) accountants will leave you free to build your business and c) the right accountant will not only get your finances in order but also optimize your tax bill. Wondering who the right accountant is? Here are the criteria: It is important to hire someone who thinks more like a business owner, rather than an employee; the ones who understand your vision and values; the ones who understand your financial pressure and work towards helping you achieve your financial goals.

I hope that today, you have taken away a lesson that will help you organize your finances the more efficient way. Don’t forget to tune in for more financial tips next week!

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

Discover Your Ability to Create Wealth

Happy New Year!

I hope you had a great holiday and are looking forward to trying out new opportunities this year!

As we move on to 2018, I just wanted to let you in on a few things. First, new year, new me, new us! We are rebranding our firm and the weekly LIVE show on Facebook. I will be showing up every Monday for a live chat on Facebook talking about subjects related to wealth building, so don’t forget to tune in each week! Simply subscribe to my Facebook page and look out for WealthAbility LIVE every Monday to get your weekly dose of interesting and motivating money advice from me (and a few other experts).

Number two, as we welcome the new year, here is a piece of advice I thought you would appreciate. It’s a little something on what I call the three pillars of wealth building. With them, you can discover your ability to create wealth.

So, what are the 3 Pillars of Wealth-Building?

For me, they are the tools you can use to not only create but also maintain wealth. I hope they are for you too.

1. Your Health

Your health is your ultimate wealth. When you are healthy, you can accomplish tasks that will help you build your wealth. Tasks such as decision-making, learning and even dealing with stressful situations. Keeping yourself healthy is essential to you and to your business.

2. Inner Work

Sometimes we find ourselves dwelling on what is going wrong in our lives. We blame ourselves for failed relationships and are afraid to talk to others about our work for fear they will learn of our failures. However, I have learnt from experience that when you appreciate your accomplishments and your potential to add value to other people’s lives, when you accept that you are not perfect and embrace your authentic self, you can look past failure and insecurity to set and achieve your goals.

3. Be Comfortable with the Numbers

Do yourself a favor this year. Learn to be as comfortable with your numbers (or at least knowing the basics of your finances) as you are with counting your hard-earned notes.  This does not mean you have to know all the details of finances inside out, just like a financial professional. But just the basics tools that is sufficient to look after yourself. It is just as it important to know how to look after your own health, feed your body with the right food, and when to seek out the doctor, it is essential to know the state of your finances and know when to seek out financial professionals for guidance.

Last Thoughts

I hope this dose of inspiration helps you discover your ability to create wealth this year. Stay tuned for more informational pieces next week!

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

Cash Out or Not? The ‘Exotic’ Ways to Use Cash in A Business

If you are running a profitable business it is likely that you have quite a lot of cash in the business and often you will be advised that if you take too much dividends or a high salary you will get taxed. This causes you to have cash in your business that you do not know what to do with. There are different strategies to take into consideration in order to enable you to use that cash in your business.

Aidan Dow, the company director of Aidan Dow Wealth Management Ltd, has taken some time to sit with Hannah Xu to talk about the different strategies and the steps you can take.

What to Do If You Want to Keep Some Cash in The Business?

If you have a company there is nothing to stop your company from having investments which means you can open investment accounts on behalf of your company. This enables you to put some funds in these investments, it is key to know how long you think you can tie the money up. If you are looking at using that money before 3-5 years it is recommended not to have an investment account or taking stock market risks. It is a good strategy to have an investment account for the business which is also separate from your name and taxed separately to your own name.

It is important to know what your objective is and how much cash you will need for the short-term but if you do not need it then an investment account is a good option for you. With interest rates so low, if you are keeping cash in the business, effectively over 2-3 years that money is going backwards. Whereas, if you can afford to tie up for 3-5 years and take some investment risk then that money will keep pace with inflation which will keep your business healthy. The money is there to call on when you have needs and you can take it out in a more tax efficient way.

What Are the Risks?

Because you are in  control of the company’s money, you can control how much risk you take with the investments. You are not restricted within the company regulations to be fixed to a low-risk or high-risk. You are able to pick your risk which means you have the flexibility of having it towards the low risk side which is down towards cash or bring in some risk in with some equity exposure.

Company Pension Contribution

A company can make pension contributions to an individual, this means that the individual will get better remuneration even though you cannot access it until you reach retirement age. It is tax efficient for the company because the company does not pay National Insurance on the pension contribution. If you are paying yourself more or the company is paying individuals more then the company would have to pay National Insurance on the salary payments it makes. If the company pays into a pension on behalf of the individuals, in some ways it feels like a salary because it is a benefit but the company does not pay National Insurance on that contribution.

Pension contribution is one of the tax deductions for your company tax. An example of this is if you have kids there is employer supported childcare which you can take advantage of.

Advice on Having Cash in The Company

  1. Know how much cash the company needs for running costs for 3-4 years before you consider tying up any cash in investments.
  2. Understand the risk, understanding your own risk profile and how the company risk profile may be different from your own risk profile because they are two different entities. Saving for the 20-30 years will have a different risk profile of saving for 4-5 years and it alters the investment profile quite dramatically by having two different time scales.

Venture Capital Trusts

Venture Capital Trusts have been running for about 20 years and it is a government scheme used to encourage investments in smaller companies and start-up companies. The government is offering really good tax breaks for people taking risks and investing in these companies. Most people start to consider this option once they have used up their ISA allowance and their pension contributions. Any money you put into a Venture Capital Trust you get tax relief on. If you invest £1, you get 30% tax relief on that £1. Throughout the life of that VCT you will get a dividend payment and it will be tax-free.

VCT are made up of a collection of up to 20 or 30 individual venture type companies, they offer growth opportunities and offer diversity because you cannot access this area of the market through normal stock markets. They are high-risk investments so it is best not to invest in them purely for the tax relief. Once you put money in, you cannot access the capital for 6 years. You cannot change the risk profile within the 6 years which is unlike a pension.

Are VCT’s and Pension Contributions Good Options for People Who Are Not Risk-Takers?

The default rate of VCT’s failing is quite high and it is up around 40%. It is a fund of different venture companies which means there is a fund manager sitting over that and picking the best investments for their Venture Capital Trust. What they usually do is meet 1000 different companies and each year they will only invest in 6. By narrowing it down it helps to reduce some of the risk. They will also pay out to these venture companies capital, so over the period of 6 years they will give a small amount in year 1 then more in year 2 etc. What eventually happens is that the companies that are not doing so well do not get much of the money because they tend to fail within 2 or 3 years. The companies that do well will receive more money and the default rate drops from 40% to 14%.

Pension Contributions are very tax efficient. Once you put money into your pension you can play around with the risk level you are taking within that pension which is positive as you are not locked into high-risk. Although you do not have access to the money, you have access to the risk within the pension.

What is Tax Relief?

If you earn anything over £11,000, you will pay 20% tax on that and if you earn over £45,000 you will pay 40% tax. If you are in that bracket and you are earning over £11,000, anything you contribute into a pension the government will give the equivalent of the amount of tax back. If you invest £1 you will get £1.40 invested which is worth it.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

How Not to Forget to Pay Yourself

One of the most important factors of building wealth of any kind is to start paying yourself. It does not matter the amount that you pay, even if it is a small amount, the most vital part is that it will accumulate over time. In Tony Robbins, ‘Money Master the Game’, it mentions the power of compounding where it explains that time can actually make a small amount accumulate so that when you get to retirement age you will have a healthy pension retirement fund. It also tells us that it is very important to start paying ourselves no matter what the income level is. Some people may question the fact that they will be living on paycheque by paycheque but the point is that you should not wait until you are earning over a certain amount before you start paying yourself. As long as you are receiving an income, you should pay yourself and then eventually start to think about planning and paying your bills etc.

In this article, we will be breaking the whole process down into a couple of steps in order to make things clear on how you can pay yourself and how you can make the idea of paying yourself more fun and positive.

Be Clear with Your Value and Objective

First of all, in order to not forget to pay yourself you will need to prioritise your needs. You cannot neglect your needs and then think about paying yourself. If you do not know what you need and if you do not prioritise your own needs then it is very hard to make things easy. You need to decide how much you need to pay your bills, groceries etc. You will also need to consider the other aspects that are important to you because if you are living under a certain budget then you cannot have a lot of luxury things. You need to decide on what you value the most. For example, if you value going out that is completely fine but you would need to let go of what is not important in order to fund the parts of your life that are the most important to you. Always know your value, know what you need and be clear on why you need that extra money.

Set Income Goal

After you have decided what you need the extra money for and why, you can start to set an income goal. It does not matter whether you are self-employed or employed, you are always able to set an income goal. If something is really important to you, you will always find the extra money. When people state they cannot afford something what it really shows is that they do not want to do whatever it takes to pay for that or they choose not to buy that. Instead of saying you cannot afford something you should start to ask yourself how can you make it affordable and then set some income goals.

If you are self-employed, you might want to work backwards and figure out how much you need to fulfil your needs and the things you value the most. You are then able to work out your bare minimum and how much you have to earn as a minimum for that particular month in order to support yourself. If you are on a fixed-contract or if you are an employee, you can still set some goals based on how much you actually need in order to support the lifestyle you really want. You might want to consider negotiating a pay rise or sell some unused items from your home to create some income.

Put a % of Income Aside First

Whenever you have a pay cheque, you need to make sure you put a small percentage aside for your long term financial future. You should not wait to pay yourself after you have paid for the expenses and there is a bit of money left over. It will not work this way, you need to make sure you pay yourself first before anything else.

When you have a business, you need to use the same concept. Whenever a customer or client pay you, you need to put aside a small percentage first and then use the rest to pay bills or expenses. If you find out you do not have enough money to fund your expenses it does not mean you have to borrow from yourself, it just means you need to re-think your current strategy. You have to strategize your business to make sure you are making extra income or figure out if there are any expenses that you can save for the time being.

This concept works for personal finance too. If you are an employee, when you receive your net pay, you can put a small percentage into your pension pot. This is a very tax efficient approach because every £80 you pay in; the government will put £20 on top and for a higher rate tax payer the government will top up even more. Paying your pension means you will get 25% return and no other investment can be as good as that.

You can also consider putting money into an ISA which will allow you to earn some tax-free interest. If you have an investment ISA or if you sell the shares then all the dividends you get from your ISA wrapper is tax-free as well.

Tax Efficiency

When you are a business owner, especially a limited company, once you decide how much money you need to fund your lifestyle it is important to go through everything with your tax advisor or accountant. You need to make sure you are extracting money in a tax-efficient way and doing it properly because when you have a limited company you cannot randomly withdraw money. You can either have a salary or dividends but you would need to work out which option is the most tax-efficient. If you have a home-based business, there are certain expenses you can claim as a business expense and you can let your company pay for it. An example of a type of business expense is use of home, which means that if you are working from home a portion of your bills will be paid for by your business.

If you are self-employed, there is no restriction. Whatever you earn, you can use as long as you have sufficient funds to pay all of your expenses as well as your tax bill. There are certain strategies as mentioned that you can use such as pension contribution and the ISA wrapper.

If you are earning really good profit but for some reason you cannot incorporate as a company it is best to consider taking more advanced advice on things like Venture Capital Trust investment which will give you good tax relief as well. Every £10,000 you invest will give you back £3,000. However, please note that this type of investment is very risky as it involves funding start-up businesses and it is likely that they will fail. If they succeed you will get tax-free dividends.

If you are running a profitable business from a limited company, you can think about retaining some money. You do not need to extract the money if you already have enough to fulfil your needs. Business can sometimes slow down, it is always ideal if you have money to have it in a vault account. You can also set up investment funds under the company name in order to keep the cash in there and get some return.

If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please direct message the author of this article so we can arrange a chat.

How Cloud Technology Has Changed the Way Accounting Services Are Delivered

The rising of cloud technology has replaced a lot of labour intensive work. The old way of accounting, which focuses only on number crunching tasks, is going to be replaced by technology. But the new breed of accounting profession will look to interest their clients with the cause and prevention of high tax bills.

Cloud Accounting

Most of us might have been through some sort of technology change over the last couple of years. The digital accounting systems that used to cost thousands of pounds are now replaced by cloud accounting in as little as £20 per month. You do not need to install it onto your PC or on a laptop. You simply have a login and are able to look at your financial information. As it is cloud based, it is easy to sync it with your bank statements which will allow you to have direct bank feeds. All of these things have replaced a lot of labour-intensive work.

Entry-less Receipt Processing (e.g. Receipt Bank)

When it comes to accounting, in the past 5 to 10 years it has involved a tremendous amount of paperwork. Nowadays there are systems and apps like Receipt Bank that can help with the workload. Receipt Bank allows you to take a picture within the app on your smartphone and import it straight to the system. It also enables you to export it as an excel document from there. You do not have to input the name, category and amount as the system does that for you. It extracts the information and saves it as a draft, which you can approve eventually.

It is very handy as you do not have to keep the paper receipts once you have taken a picture of them as it is stored in the cloud. There is a study that shows that keeping physical copies of receipts is not good for your health as the ink on the receipts have a certain type of chemical in them. Receipt Bank not only saves you time and makes things easier, it benefits your health too. When you are digitally storing information, you must always keep in mind cyber security and data protection but in general accounting systems do have a certain level of security that they aim to maintain.

Benefits of Cloud Accounting

  • Most clients nowadays prefer to provide information via cloud accounting especially when it comes to bank statements. This is a benefit as you do not need as much space or storage as before. If some clients do send some paperwork, you can just store it temporarily and scan the document to store it in a cloud then send it back to the client.
  • Less space required and less storage means you do not need to spend much money hiring somewhere big. You can hire an open office and are able to still get the job done.

What System Should You Use If You Are Self-Employed?

When you become self-employed or start your own company you have to take care of your own tax and self-assess your accounts and your tax bill. This means you would need to keep track of how much profit you have made and keep track of your expenses so that you can run your business properly. Most people nowadays do own their own laptops or have access to one, it is very easy to pull out a spreadsheet to total all income and keep a note of all the receipts in order to categorise them etc.

Microsoft Excel is cheap and very easy to use, it is quite straightforward but the downside of it is that when you need to put out a report, it can be quite time-consuming as you would need to key in all the words and dates into the spreadsheet. Another downside of Excel is that if you have inputted data into the spreadsheet, anyone else can edit it and input other data which can eventually create errors and can be hard to track. With cloud technology, you can view what has been changed and can track who has edited it which makes things clear. You can always find out the root of a single mistake and are able to correct it.

There are several cloud technologies that you can use such as:

  • Xero
  • QuickBooks
  • KashFlow

Always go for the providers that are bigger, popular and have more recommendations because the smaller ones might end up being merged by the bigger providers.

When Is the Right Time to Start Using Bigger Providers Instead of Spreadsheet?

Spreadsheet is very straightforward to use, if you really want to keep track of your businesses it is more ideal to set up the company on a proper accounting system especially if you are planning for the business to grow. If you do not have a lot of transactions then you can take the time to get familiar with the accounting system. If you have a lot of transactions, you can outsource but you need to make sure you do have the knowledge and the wellness to know what is going on. If you are really serious about your business then it is important to have a proper system set up from day one.

There are people previously on desktop systems such as Sage and would like to transition. You can use a third-party system called Move My Books and you can take the Sage backup and use it to transition to Xero. It helps because you do not need to stress out too much, of course in the end you would need to double-check everything but if you take the right steps, everything should match perfectly.

Nowadays as long as your bank statements are synchronised with your accounting system and most things are automated then you are able to submit important information to HMRC or Companies House. All you or your accountant would need to do is just tweak the figures and then you are able to submit it which is less time-consuming. If you are doing your bookkeeping on Xero, you are able to submit your VAT Return straight from there which is very handy. Xero also allows you to customise your reports just to show you the numbers that really matter to the business. Just because a lot of the work that accountants have been doing has been replaced by technology does not mean that it will make all accountants redundant. It just means that is time for the profession to change the way that it delivers its service.

If Cloud Technology Replaced A Lot of Accountant’s Work, How Will That Change the Way Accountancy Services Are Delivered?

The idea is that cloud technology will automate most of the accounts and tax preparation work, the new breed of accountancy profession will focus more on caring about clients’ needs, help them ease their tension around cash flow problems and pay the right amount of tax through their proactive advisory services. Certainly, a cloud accounting system will make your life much easier. It also makes the accountants life much easier too and that means you can expect slightly reduced accountancy fees when you operate your business on a cloud accounting system.

What it really means is accountants need to change. They will no longer be paid for just adding up the numbers. Technology will do that. Instead, the accountant for the future will interest their clients in the care of their financial health, in tax saving, and in the cause and prevention of cash flow problems. Some accountants will make that change. Some won’t. Either way, it is a good thing for business owners.

If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please direct message the author of this article so we can arrange a chat.