Early Mortgage Repayment - Extra Dividends vs Entrepreneurs Relief

[dingdong]

Given inflation is currently rising it's probably a good time to not pay your mortgage off early and let inflation reduce the real cost of the debt. Paying off mortgages early is not always a good idea.

[Maslins]

What ChimpMaster and TheFaQQer said.

MVLs only became an option ~5 years ago. Every budget/Autumn statement we at MVLO half expect them to be killed off. They haven't yet, but relying on it still being an option unchanged from now in 8 years time is a bit daft IMHO.

Obviously I'm not saying MVLs are a bad option, just that planning one for 1-2 years down the line is ok if you bear in mind there's a risk it might not be there. No point planning beyond that, too many things could change.

[TheCyclingProgrammer]

IMO leaving 50k in your company isn't enough of a warchest.

Hmm, it's not terrible. I think it's better to think of your warchest in terms of time, i.e. how long will it sustain you without any work. For somebody taking salary + dividends up to the higher rate threshold, £50k is probably just over a year's worth, which isn't too bad when you think of it that way.

That said, I'm more comfortable with 18 months, a year is my absolute minimum.

[SueEllen]

To be fair you don't have to leave the money in the company if it is tax efficient to get it out.

[handyandy]

Given inflation is currently rising it's probably a good time to not pay your mortgage off early and let inflation reduce the real cost of the debt. Paying off mortgages early is not always a good idea.

Not, IMHO, a good idea. The OP is admirable in thinking through how the debt will be paid off and whether it is option A or B he has the right objective. I've always worked on the basis that the goal is to live well now and to live better later - so getting the right balance between spending on now, managing debts and saving for the long term is critical.

The question of whether the tax laws will stay the same is a real concern - it seems that HMRC and the government no longer consider the 'risk' of working for yourself or being a business to be one they want to help mitigate through the tax system. I guess this means that everyone (employees, self-employed and small businesses) are no regarded as being part of the 'gig' economy. So don't expect entrepreneurs relief or MVL reliefs to stay around long.

PS - sorry to sound like an old fart.

[Ebenezer]

Business bank balance £100k retained profit earning 0% interest

Do something about this; Aldermore/Cambridge & Counties/Other

Plugging this into my mortgage calculator assuming a 4.25% variable rate after the initial 5 year fixed term

I too, assumed it would be impossible to remortgage, and wasted a few months and a few quid on SVR before discovering that I could remortgage with the same lender with a few mouse clicks.

and with my monthly repayments fixed (overpayment reducing term not monthly) indicates that my mortgage would be paid off in 8.5 years,

Think carefully about whether you want to do this. Reducing the monthly payment increases the length of time your warchest will last, and leaves you with the option of paying off the balance all at once when you retire/go permie/phoenix the company/whatever.

IMO leaving 50k in your company isn't enough of a warchest. I'd be quite happy leaving up to 100k in and then wondering what to do with the extra above that. Thinking about it from a warchest perspective would give you your answer IMHO.

I've been thinking about this recently in a wider investment context. It's often advised to keep some % of your investable assets in low-risk assets - cash, short term bonds, etc. However, many contractors are in the non-standard position of having a big chunk of cash tied up in the company, which might mean you can take a different view of investment risk outside the company, possibly even to the extent of willfully not paying off the mortgage in order to leverage a share portfolio. Naturally, this doesn't constitute advice!

[danny13]

Some interesting posts and points of view. Considering the best course of action involves a fair amount of mystic meg crystal ball gazing. I am skeptical of continued house price inflation especially considering the location I have brought in (I've also been convinced the housing market was in a bubble for the last 10 years - hence buying relatively later in life - just turned 40).

I'm assuming that if there was a change in policy regarding entrepreneur relief there would be a window before the change came into effect, in a similar manner to the recent public sector IR35 reform, possibly an invalid assumption - I'm not up to speed with how often changes are made with immediate effect.

The potential private sector IR35 move would obviously have a big impact on my 'financial planning', lots of moving parts in trying to figure out the best course of action. I have in the past dabbled with a share portfolio, tending to invest in the falling knives, lost about 25k on Rockhopper, so now I just follow a single holding investment strategy with my entire SIPP in an All-world ETF fund.

I think for now I will consider my 2.5% 5 year fix as fairly cheap credit, continue building a warchest and try to find a good fixed term accounts/bonds to place my warchest in. This post has highlighted to me that there is no fixed 10 year plan - things change so it will require fairly regular re-evaluation. My main concern was whether I was missing a trick by focusing on being tax efficient and that potentially the mortgage compound interest saved by overpayment would be significantly greater than the cost of drawing extra dividends - I need to do some more number juggling but I'm fairly certain it isn't.

[danny13]

you could get married, give her shares, and double the basic rate dividends you are paying.

Forgot to consider this, good point.

you'll soon have a mortgage-free house to give her when she divorces you.

[youngguy]

Do something about this; Aldermore/Cambridge & Counties/Other

How does this work in practice from an accounting perspective ? Ie what do you need to record?

[northernladuk]

How does this work in practice from an accounting perspective ? Ie what do you need to record?

Just link them to Freeagent or upload your statements and then explain the transactions.