Keeping money in the company vs dividends

[Rik1087]

Hi All,

about 11 months in to my current contract. One thing I have wondered is what are the advantages / disadvantages or withdrawing the majority of funds on an ad-hoc basis? If you leave enough in for expenses and commitments (and you’re staying under the tax bracket via an additional shareholder for instance) what are the downsides?

does it reflect badly that your company isn’t holding a large amount of retained funds when it comes to finance? I can see the argument of lump sums being put into a pension at the end of the year, but I pay monthly into that at present.

I don’t know if I am missing a trick, as it seems the majority just keep large amounts in the company and only take out what they need?

I’m of the view that it has to come out at some point, why not now, what am I missing?

[wattaj]

I don’t know if I am missing a trick, as it seems the majority just keep large amounts in the company and only take out what they need?

Those will be the people who realise that a war chest is of great comfort in lean times.

[northernladuk]

about 11 months in to my current contract. One thing I have wondered is what are the advantages / disadvantages or withdrawing the majority of funds on an ad-hoc basis? If you leave enough in for expenses and commitments (and you’re staying under the tax bracket via an additional shareholder for instance) what are the downsides?

Downsides are you'll spunk it up a wall and then when you are out of work you've got nothing to live on. Simple as that.

does it reflect badly that your company isn’t holding a large amount of retained funds when it comes to finance? I can see the argument of lump sums being put into a pension at the end of the year, but I pay monthly into that at present.

Reflect badly on who? By who? The amount of money in your LTD is irrelevant if you are running it properly and you've have a business plan/budget. You could take every single available (available after tax, vat etc) penny out every month. No one gives a jot.

I don’t know if I am missing a trick, as it seems the majority just keep large amounts in the company and only take out what they need?

I’m of the view that it has to come out at some point, why not now, what am I missing?

What you are missing is what are you going to do when your contract ends and you don't get another gig for two, three, six months or more. What are you going to live on? I've have literally seen grown men cry when they are given their notice on long gigs because they've just spent it all expecting end to end gigs with no budget for down time.
You need at least 6 months full pay/dividends in the company as your warchest. Even more if you want to be super comfortable.
Take the minimum to live/meet tax brackets and leave the rest in the company until you've got the warchest. You should be paying yourself less than you've ever earned in the first gig because you've a very short time to build up a lot of money. To make 6 months warchest out of an 11 month gig means you are going to have to be very frugal indeed.

Your gig can end tomorrow. Number 1 priority for any new contractor is get that warchest up so you don't lose the house just because you can't get a second gig. And yes, we have had people on here that have been in this position.

Once you've got that and more THEN you can look at doing something fancy with the money.

[malvolio]

Having had an enforced 14 month layoff due a combination of factors including family illness, I would not have been comfortable without the war chest allowing me to keep the salary going to pay the fixed bills that needed paying (the other half 's income pays for day-to-day running costs). So to that extent, the more the merrier. Don't forget that once it's in a pension fund it's there until you are at least 55 (or possibly later if a certain party wins the next election!) so you can't treat it as emergency funds.

However you have to have a compromise you are happy with. I always aimed to keep 6 months gross salary in the company, you will have to make your own mind up. But remember one of the many justifications for having e company is to smooth out what can be a variable income, so running it dry has always felt to be a little short-sighted, if not absolutely foolish.

[jamesbrown]

or possibly later if a certain party wins the next election!

True, but the Tories are quite unlikely to win. As it stands, they are increasing it to 57 in 2028

[alphadog]

The biggest downside to me of building up retained profits in your ltd is the 10pc inflation tax. You might save on dividend taxes if you have future gaps between contracts, but you need to balance that against guaranteed real terms losses on the retained profits.

[PerfectStorm]

Nothing wrong with taking money out (if it's distributable profit of course- consult with an accountant)

It can still be 'warchest' just it doesn't need to be in the company's one.

Consider this - you have a certain amount of tax allowance overall beyond which it turns into silly money. About 52k into which needs to fit your low salary and your dividends.

Now you could have that in your business account earning 2.7% OR

You could pull it out (you're going to need the money at some point anyway and better off having it in one financial year than having to take two years worth next year)

Then once pulled out you can put it in a 3.4% interest pot like Monzo where it's available all day long but not there 'to spend' without at least one move on the app (which is about as many clicks as it takes you to take money out of the business)

Yes you'll pay tax on those dividends, but then you would at such point as they were going to hit your account anyway.

The rest can stay in the company and either taken in future years or split over this year and future years.



In short, take out the money you can that isn't taxed heavily, and put it in something that earns interest on the consumer side, then leave the rest gaining interest on the business side. Oh and your 10k directors loan, you could invest that too if you wanted.

And the sort of people who think this means pissing money up the wall are also the sort that think that you use credit cards to borrow money. Well, they might.

[northernladuk]

In short, take out the money you can that isn't taxed heavily, and put it in something that earns interest on the consumer side, then leave the rest gaining interest on the business side. Oh and your 10k directors loan, you could invest that too if you wanted.

And the sort of people who think this means pissing money up the wall are also the sort that think that you use credit cards to borrow money. Well, they might.

Where you are correct in what you say I think it's poor advice, particularly for a noobie that doesn't understand. I've seen more people in trouble keeping their warchest out of the business. The wife gets a say and it just gets too tempting. I've not seen anyone, not one person, get in to bother keeping their warchest in the business. The few percent you are talking simply isn't worth the risk. It's your business warchest so IMO until you (the OP) have got your head around the game leave it in the business.

And do not dick around with Directors Loans for investing. It's a few % of 10k that's got to go back in in less than two years. Again, we've had plenty of people messing DL loans up and it actually costing them more. Having the DL available to reduce your tax burden over the end of year or making up a temporary shortfall is much more valuable than a few percent with a good level of risk.

Play safe first, then when you are absolutely sure you can it then you can push the boundaries with your money.

[Maslins]

I'd agree with most of the last two posts, PerfectStorm/NLUK ^^

Don't muck about with director loans unless you really have to. 9 times outta 10 people think it's really clever, and end up regretting it. Like a less severe outcome than using a tax avoidance scheme.

But otherwise, ideally get both company and personal finances in a situation where you're not living hand to mouth. Then make sensible decisions based around financial requirements and taxes.

If you're earning lots, but need little, it can still make sense to draw a decent sum out and save it personally. Better that than take £20k/year for 5 years, then want to take out £200k to buy a home. May seem prudent, but you'd have been much better off taking out at least £50k/year to use your basic rate band, and saving it personally.

[northernladuk]

I'd agree with most of the last two posts, PerfectStorm/NLUK ^^.

Woohoo. At this rate I might get a cold beer bought for me at the do