Recently, on our podcast, A Dab of Investment, we tackled quite an interesting topic – career change. Many people tend to switch careers at least once in their lifetime, and this change could either be simply changing jobs or starting your own limited company. 

But how do you safeguard against potential Financial disasters that could arise from this big move?

In this blog, we’ll explore the key factors to help you safeguard your finances when starting a limited company. 

But first, let’s examine the basic step to consider when making any form of career change: a Financial Safety Net.

Building a financial safety net

Whether you’re just switching jobs or starting your own company, having a financial Safety Net is a good place to start. You want to be sitting on at least a few months’ worth of income. 

This is because even though you may feel sufficiently prepared for what lies ahead, things don’t always go to plan. For instance, you could join a new company that goes under straightaway or find out that your new job isn’t what you thought it would be. 

In scenarios like this, having a safety net can help you wade through the storm and tide you over for the next few months.

Starting a limited company

Further considerations emerge when you’re starting a limited company. In our experience as independent financial advisers, people often start these companies to offer consulting services and may charge clients a daily rate. When the money rolls into the company’s account, you pay corporation tax, and subsequently, you can then pay yourself via dividends. 

Typically, if you earn less than £50,000 per year through your limited company, you might end up paying less in taxes compared to what you would pay if you were a regular employee. This sounds like an attractive benefit. However, there are a few factors to bear in mind.

The company must be financially viable

It’s highly important to note that the limited company is its own living, breathing entity. This means that you have to water it and keep it sufficiently nourished in order to facilitate its growth.

Rather than it existing solely for your needs, it has to be financially viable – making enough money to sustain itself. In some cases, it might be helpful for the company to have some sort of consistent, guaranteed income. This could be a specific service you offer that brings in a steady amount of money each month.

Another way to keep the company stable is by avoiding paying yourself a huge salary at the start. Instead, rely on personal savings to cover your living expenses, as this will help you keep as much money as possible within the company to help it grow. As the business becomes more profitable, you can start increasing your own income.

Overall, the nourishment of the company – making sure it has a reliable income and is stable – is key to protecting yourself both financially and personally.

Should you sell your assets to invest in your company?

It’s not uncommon for people to want to invest in their companies. However, as with everything else, it’s advisable to look at the bigger picture. How promising is the business opportunity? 

You don’t want to start throwing money at a company that will likely not see any realistic returns for a long while. In most cases, it’s advisable to start off the business with as little money as possible and leave the investing for when profits begin to roll in.

Pension contributions

Making pension contributions through a limited company is a highly efficient way to save towards your retirement. However, it’s best to hold off until your company is on solid financial ground.

This is largely because, unlike a personal ISA, which you can access when you hit a rough patch, pension funds are generally untouchable until you reach the age of 55. This means that if you’re 40 and your business hits a rough patch, that pension money won’t be accessible for at least another 15 to 17 years, leaving you in a financial bind.

Essentially, putting your money away in pensions needs to occur only after the company has achieved a reliable income stream and, perhaps, a safety net for less profitable times.

In a nutshell

When contemplating a significant career change, especially the leap from being an employee to starting your own business, smart “disaster planning” is the way forward. 

For instance, if you’re starting your own company with a significant initial investment, know that these investments might be lost and prepare accordingly. It’s also worth noting that it’s not a loss you want to bear if that money is borrowed. 

Another layer of this “safety net” is income protection or critical illness insurance. If life throws a curveball like serious illness your way, these safeguards can be a financial lifesaver, helping you work through the rough patch.

I hope this blog has given you a few ideas on how to protect your financial future when making a big career change. If you have any thoughts or questions, feel free to get in touch by emailing [email protected].

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

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