Leaving warchest in company

[psychocandy]

Never done this. I always take dividends out (up to 40% bracket). However, I can see some advantage of leaving there.

But, at the risk of missing the obvious, how does this work?

OK, Year 1 I decide to leave £100K in the company.
As such, profit is £100K for the year accruing CT of £20K.

Year 2 I decide to take a year off but still pay myself £10K salary. In effect, for this year the company makes a £10K loss.

BUT, I can't see how doing this would be advantageous. 20% has already been paid on the £100K so paying it out as salary now would save nothing. Might as well just divi it out.

Is this right? Or have I got it wrong?

Would be nice if you could have £100K profit one year, then take 10 years off and pay out the salary (and thus no tax) over these 10 years.

[northernladuk]

But, at the risk of missing the obvious, how does this work?

Understatement of the year that is.

This isn't a serious question is it? You can't see the advantage of keeping money that you don't need just yet in the company? Meaning everything you divi out you can spend. As opposed to divi'ng everything out, paying tax on it in the next tax band and then putting it in a personal warchest?

Not everyone agrees about keeping it in the company but it's my favoured method.

We have also done where you would keep warchest as well so a search might give you an idea of peoples differing opinion.

[Smartie]

Year 1, take £80k in salary and dividends, pay £26k in tax (guess)
Year 2, take nothing.

Or,

Year 1, take £40k in salary and dividends, pay £8k in tax
Year 2, take £40k in salary and dividends, pay £8k in tax

Save £10k in tax.

[northernladuk]

I think the thread was called Where do you keep you warchest.

[kal]

My preference is to take salary and dividends up to the 40% limit, its enough to get by on and the rest stays in the company in case, next yr I am looking to move to an offset mortgage (when my current fixed rate finishes) and so will then probably draw more to cut the mortgage interest payment (now if only I could just use the money in the company account to offset the mortgage instead )

[Smartie]

I think the thread was called Where do you keep you warchest.

Indeed. If you take it out of the company it has to go somewhere.
If it's warchest then you won't be making company payments to a pension with it.
When it comes out of the company it's taxed.
If you take it all out in one year it's taxed more highly than taking it out over a period of years including periods when you're not earning.
QED.

[kal]

Indeed. If you take it out of the company it has to go somewhere.
If it's warchest then you won't be making company payments to a pension with it.
When it comes out of the company it's taxed.
If you take it all out in one year it's taxed more highly than taking it out over a period of years including periods when you're not earning.
QED.

But isn't it taxed regardless of whether you have taken it out of the company, corp tax paid so as long as you are taking up to the 40% limit it makes no difference either way?

[Ticktock]

I take everything I can out of my profits up to 40% limit, based on salary to me and divis to my wife and I.
I've been squirreling as much as I can away from this in liquid places like a Santander 123 account for the interest and then ISAs.
Initially, this was my warchest.
Now that I've bumped up against the 40% limit for the year, everything else stays in the company account, and when that's been built up enough will become my warchest, whilst my personal savings will become personal savings, available to put towards a house, new car, or whatever.

The advantage to me of getting as much out as I can is that I see more flexibility in personal savings / investments, allowing me to get a better interest rate or other return. The business account keeps the money out my grubby little hands (not that I'm really a spendthrift anyway) so that I know I can continue to pay salary and divis if I'm between contracts, and eventually whenever I stop working.

I say draw as much as you can out (if you can be trusted not to spend it) for the better savings rates, and because you'll want to at some point in your life anyway, but then if you can build your warchest in the company account.

[Smartie]

Yes, corporation tax is paid on profit regardless of how or when you pay yourself.

The advantage of keeping money in the company rather than taking it out is as described above when you have the £100k yearly company income mentioned at the start.

A lot of people talk about 'taking income up to the 40% bracket' - the question is what to do with the money that your company has earned which would take you over that if paid it out to yourself.

[chef]

But isn't it taxed regardless of whether you have taken it out of the company, corp tax paid so as long as you are taking up to the 40% limit it makes no difference either way?

your not saving on corporate tax, that cant be avoided. what you are saving on is the extra tax paid when you breach the higher tax rate bracket for taking over 40k out in a year.

If you dont need the money then why pay the extra tax on it for breaching the higher rate limit when you can use the money later and save that extra tax.