Fiisch Ltd vs Fiisch the person money management

[fiisch]

That wondrous time of year is nearly upon us... Dividend Day!

Wondering if there's any basic rules or framework you use for managing your company vs your personal funds that you would care to share please? I've recently returned to contracting, and when I was a contractor a few years before I found those lines became very blurry and I ended up using my ltd co like a savings account that I could dip into willy-nilly (daft, I know). I like to think of myself as having pretty good personal money management, but the addition of a ltd company made my systems go a bit awry and I got in a bit of a mess (e.g.: unnecessarily paying higher dividend tax, putting too much into a pension and then leaving myself with a war-drawer instead of warchest)... Not looking for Dave Ramsey-style advice on how to budget, more how you eat your dividends / any % rules you operate in terms of rainy day funds, pension and the like?

E.g.:
- Do you take all of your dividends in April and deposit in a savings account, and then drawdown through the year? Or do you take them monthly?
- Do you pay into a pension monthly, or make a one-off annual contribution once you know the position of your company?
- Are there any basic guidelines you operate in terms of splitting funds e.g.: personal savings / company savings etc.
- Any rules you follow e.g.: never paying high dividend tax.

[northernladuk]

All the things you are ask are highly situational to each person so really not sure what you are expecting to get from asking. I'd go as far as to say if you've not managed it very well so far just jumping on other peoples ideas and not doing what you need to is just going to make things worse. If you've admitted to yourself you've made a mess then I'd say asking what others do is completely the wrong approach. I can't get my head around you saying you have good money personal mgt but a company throws you as well. It's not overly complex so if you've a good base of personal management the company shouldn't add much overhead.

First off, I assume, and hope, you've got an accountant. If so I'd say your best bet is to spend some time with them and understand how it all works. You messed up once, don't do it again and get proper advice and understanding. When you've done that then you can look at your situation and chose what is best for you. Know how much you can divi and the brackets and then marry that up with your household budget and that's your income/divis/salary sorted. Then you can look at what's left and make an informed decision on state of spare cash which helps you decide how big your warchest needs to be and then leads on to how much spare you'll have for a pension.

Two points I'd make though..
1. Warchest is paramount. Forget pension and scrimp until you've got at least six months of money to stay at a level you can live on. It's a pain spending the warchest but it's there to relieve the stress and keep a roof over your head. I've seen a grown man in tears when he got let go banking on the future income to cover his taxes and living.
2. Don't let the tax tail wag the dog. Live within your means but don't let the tax bracket be the be all and end all. Going over by a manageable amount isn't going to kill you. Just plan it well. Don't dip in to it like it's free money, set a budget but don't get stressed over a bit over the threshold.

And some responses to the examples you gave.

Do you take all of your dividends in April and deposit in a savings account, and then drawdown through the year? Or do you take them monthly?

You can only do this if you've enough profit from the previous year. DO NOT.. EVER.. divi out the lot as it's not all yours. Some of it is the tax mans. Don't divi it out thinking later months invoices will pay the tax. That's called an illegal dividend. If you are in a position where you've 30k+ of PROFIT from last year can you divi out in April. In your situation I'd say do it monthly and budget.

- Do you pay into a pension monthly, or make a one-off annual contribution once you know the position of your company?

Warchest first, then work out what you can afford monthly and if you've spare top it up with a lump sum. That is IMO though and highly dependant on your whole financial situation. You can use previous years unused allowances so even if you don't put in to the pension for a few years you still have the total allowance if you want to make a large payment further down the line

- Are there any basic guidelines you operate in terms of splitting funds e.g.: personal savings / company savings etc.

Again Warchest is number 1. Live on the basic until you've 30, 40 or more K in the bank. Divi out the minimum you need to live keeping half an eye on the thresholds then that means you won't have much in the way of company savings for awhile.

- Any rules you follow e.g.: never paying high dividend tax.

No rules. Understand your finances and just do what you need to at any given point. Stay under the thresold while you can to be efficient but be happy to go over in an expensive year. Pay pension when you can bearing in mind you can make lump sums yada yada. Have guidelines you try to stick to, not rules which will mess up the overall planning and execution. What you do will change constantly over a few years anyway. First 6 months plus will be save like a b*****d to get the war chest up, then you can relax a bit on divis and then when savings start accuring you can think pension. When you pension is being paid and savings are growing you need to change gear again. Don't let rules get in the way of what the proper thing to do at the time is.

[fiisch]

Thanks NLUK - that's helpful. I do indeed have an accountant - swapped over from Brookson to a large monkey firm in Bolton about 3/4 years ago, who have been brilliant and I've since referred a few colleagues (hopefully you received your referral fee??!! )

I have been panicking over pension in particular as historically I've been very proactive in contributing quite a bit more than the bare minimum as a permie, so I've got a reasonable pot for my age but feel like I'm losing ground and then panic and put random bits in, but focussing on the war chest firstly sounds like a better way to go.

I find managing a company awkward as even with FreeAgent it's complex to work out the exact financial position (ok, you can see the Dividend Amount carried forward, but then you've got personal tax to consider, and there's the gap between invoicing and getting paid where the figures in the bank vs money owed is skewed). I'm very particular about spreadsheeting and budgeting with personal finances, which I don't seem to be able to do with a company, probably because the tax part confuses me (VAT, Corp Tax, Divi Tax, Company Expenses etc.)

It also gets further complicated as I have been in perm employment this year, and split the dividends 50/50 with my wife who pays a different level of tax. I've put in a call to discuss to sense check some plans with my accountant. Thanks again.

[northernladuk]

Thanks NLUK - that's helpful. I do indeed have an accountant - swapped over from Brookson to a large monkey firm in Bolton about 3/4 years ago, who have been brilliant and I've since referred a few colleagues (hopefully you received your referral fee??!! )

I did thank you

I have been panicking over pension in particular as historically I've been very proactive in contributing quite a bit more than the bare minimum as a permie, so I've got a reasonable pot for my age but feel like I'm losing ground and then panic and put random bits in, but focussing on the war chest firstly sounds like a better way to go.

Remember your warchest 'could' also be a big chunk in to your pension when you finally finish as well. With a good wind you won't need to dip in to it or if you do replensih it so when you finally do throw the towel in it should be there to use. Don't rely on it, it's a warchest for a good reason, but i can factor in to your longer term plans at the end.

I find managing a company awkward as even with FreeAgent it's complex to work out the exact financial position (ok, you can see the Dividend Amount carried forward, but then you've got personal tax to consider, and there's the gap between invoicing and getting paid where the figures in the bank vs money owed is skewed). I'm very particular about spreadsheeting and budgeting with personal finances, which I don't seem to be able to do with a company, probably because the tax part confuses me (VAT, Corp Tax, Divi Tax, Company Expenses etc.)

FA does display that and the accountants can give you a breakdown on projected earnings giving you a pretty clear picture of what's possible to dividend per month. They'll also tell you of that figure which is the most tax efficient. When you've got the warchest you'll have a minimum and maximum figure and that's all you've got to consider. You don't need to worry to much about the taxes, just what the profit is per month and that's the figure you've got to work with. The rest isn't yours.

It also gets further complicated as I have been in perm employment this year, and split the dividends 50/50 with my wife who pays a different level of tax. I've put in a call to discuss to sense check some plans with my accountant. Thanks again.

Ah, if you are splitting divs then you have the ability to draw too much out so you need to be more careful than a one man band. Diving you both up to the thresold isn't going to leave a lot for the warchest so definitely need the numbers to plan. Start with what profit you have and then work that back to your income requirements with an eye on the thresholds.

You will def need to speak to the accounant if you've swapped mid year as well as tax paid will affect wether it's worth paying yourself a salary as well. I'd expect it's not efficient to pay yourself it if you've already broken through the tax thresholds. They'll put it all in writing for you.

[Ketto]

I find managing a company awkward as even with FreeAgent it's complex to work out the exact financial position (ok, you can see the Dividend Amount carried forward, but then you've got personal tax to consider, and there's the gap between invoicing and getting paid where the figures in the bank vs money owed is skewed). I'm very particular about spreadsheeting and budgeting with personal finances, which I don't seem to be able to do with a company, probably because the tax part confuses me (VAT, Corp Tax, Divi Tax, Company Expenses etc.)

Accounting>>Reports>>Balance sheet for the current year is always handy in Free Agent. Shows you total assets for the company taking in to account outstanding business tax amounts, outstanding invoices, amounts you owe the directors loan account etc

[northernladuk]

Just had a thought which is going to add a new level of complexity here. Your next gig is likely to be inside so it's likely you are going to have to flit in and out of your company finances which makes planning a bit more difficult. It's likely you are going to have a warchest in the company and/or have to budget and get a warchest up from your inside gig as well. Warchests from inside gigs are even harder as it's money sitting there in the bank, goes in to savings and easy to spend on a new bathroom so will need to be regimented. Mention this fact to your accountant to help with their advice.

[ladymuck]

...

FA does display that and the accountants can give you a breakdown on projected earnings giving you a pretty clear picture of what's possible to dividend per month. They'll also tell you of that figure which is the most tax efficient. When you've got the warchest you'll have a minimum and maximum figure and that's all you've got to consider. You don't need to worry to much about the taxes, just what the profit is per month and that's the figure you've got to work with. The rest isn't yours.

...

I don't use FA so am not familiar with how it displays the data. Therefore ignore me if FA displays profit with an estimate of your CT liability built in.

I always add a provision for CT off the gross profit to get to the net profit from which I can determine my dividends. This is a manual journal I do every quarter as a basic 20% of profit, just so I can keep an eye on things. Helps me get an early feel for the CT liability so I can put that aside throughout the year as well as ensuring I don't accidentally overcook the dividends.

[fiisch]

I did thank you

Remember your warchest 'could' also be a big chunk in to your pension when you finally finish as well. With a good wind you won't need to dip in to it or if you do replensih it so when you finally do throw the towel in it should be there to use. Don't rely on it, it's a warchest for a good reason, but i can factor in to your longer term plans at the end.

Fair point - I think I'm overly aware of missing out on investment returns and obviously it's nice to see the Corporation Tax liability reduce after making contributions, but once it's gone, it's gone until retirement...! Having something to fall back on will make things less stressful at renewal time!

Ah, if you are splitting divs then you have the ability to draw too much out so you need to be more careful than a one man band. Diving you both up to the thresold isn't going to leave a lot for the warchest so definitely need the numbers to plan. Start with what profit you have and then work that back to your income requirements with an eye on the thresholds.

You will def need to speak to the accounant if you've swapped mid year as well as tax paid will affect wether it's worth paying yourself a salary as well. I'd expect it's not efficient to pay yourself it if you've already broken through the tax thresholds. They'll put it all in writing for you.

I think this is the bit I'm most wary of - I recall the temptation of taking different divi's every month. Wife wants a new sofa, I'll just take an extra £1500 this month etc... Whereas really, I need to be taking a flat amount and managing company and personal savings as entirely separate accounts for very different purposes.

I'm not paying myself a salary this year, although another slight headache is I am getting a tax rebate each month which HMRC will then repay at the end of the tax year, so my figures on FA aren't totally reflective of current position (although once rebated, I'll be better off, as it were).

Re.: Inside/Outside - I hadn't thought of that. Insurance does seem to be predominantly outside roles, but if I do have to take an Inside, I guess the ideal is to be able to utilise the dividends from ltd co and then hammer the pension from the inside gig.

Thanks all, this has been helpful. I've got the spreadsheets out tonight modelling different divis to decide on a sweet spot!