First post - go gentle!
I'm struggling with a fairly basic investment conundrum, to draw extra dividends from my ltd company in order to overpay my mortgage vs sitting tight for X years and then potentially ceasing trading.
So assuming I remain in constant work over the next few years (big assumption), clearing approx 70k profit per annum....
Current financial picture, draw £40k from company each year (10k salary, 30k div) half of this goes on mortgage repayments the other half on living costs. Just taken out a 360k mortgage on a 5 year fix at 2.5%, I can overpay 10% per year.
Business bank balance £100k retained profit earning 0% interest
Option 1
Draw an additional £50k dividend each year (using my current retained profit starting balance of 100k to fund the shortfall). This would incur additional income tax circa £16k per annum. From the £50k dividend I'd have £34k / annum to overpay my mortgage. Plugging this into my mortgage calculator assuming a 4.25% variable rate after the initial 5 year fixed term and with my monthly repayments fixed (overpayment reducing term not monthly) indicates that my mortgage would be paid off in 8.5 years, the overpayments saving me £144k of interest. However I would have paid an additional £16k x 8.5 years of income tax (£136k).
Option 2
Continue as I am currently effectively retaining 30k profit in my limited company each year. After 8 years I should have banked an additional £240k, this with my starting balance of £100k gives a total of £340k. If I cease trading I would hopefully gain entrepreneurs relief so would pay 10% capital gains so my net would be £306k, the outstanding balance on my mortgage at year 8 would be £291k so I could pay my mortgage off with a little to spare.
Spending an hour figuring this out might have answered my own question, obviously lots of assumptions and best case planning, from the above option 2 seems to be optimum as I retain a war chest however I would not be able to earn a living as a contractor for 2 years after claiming the entrepreneurs relief (assuming the rules don't change in the next 10 years).
Have I missed anything? Any other considerations? If I could figure a way to get a relatively risk free return on my business bank balance option 2 becomes even more attractive....
I'm struggling with a fairly basic investment conundrum, to draw extra dividends from my ltd company in order to overpay my mortgage vs sitting tight for X years and then potentially ceasing trading.
So assuming I remain in constant work over the next few years (big assumption), clearing approx 70k profit per annum....
Current financial picture, draw £40k from company each year (10k salary, 30k div) half of this goes on mortgage repayments the other half on living costs. Just taken out a 360k mortgage on a 5 year fix at 2.5%, I can overpay 10% per year.
Business bank balance £100k retained profit earning 0% interest
Option 1
Draw an additional £50k dividend each year (using my current retained profit starting balance of 100k to fund the shortfall). This would incur additional income tax circa £16k per annum. From the £50k dividend I'd have £34k / annum to overpay my mortgage. Plugging this into my mortgage calculator assuming a 4.25% variable rate after the initial 5 year fixed term and with my monthly repayments fixed (overpayment reducing term not monthly) indicates that my mortgage would be paid off in 8.5 years, the overpayments saving me £144k of interest. However I would have paid an additional £16k x 8.5 years of income tax (£136k).
Option 2
Continue as I am currently effectively retaining 30k profit in my limited company each year. After 8 years I should have banked an additional £240k, this with my starting balance of £100k gives a total of £340k. If I cease trading I would hopefully gain entrepreneurs relief so would pay 10% capital gains so my net would be £306k, the outstanding balance on my mortgage at year 8 would be £291k so I could pay my mortgage off with a little to spare.
Spending an hour figuring this out might have answered my own question, obviously lots of assumptions and best case planning, from the above option 2 seems to be optimum as I retain a war chest however I would not be able to earn a living as a contractor for 2 years after claiming the entrepreneurs relief (assuming the rules don't change in the next 10 years).
Have I missed anything? Any other considerations? If I could figure a way to get a relatively risk free return on my business bank balance option 2 becomes even more attractive....
Comment