Novice queries on cash flow / drawing dividends

[Rivendell]

Hi,

I'm soon to embark on my first contract (6mth) and have some anxieties re:cashflow. I'm sure these are quite natural given my novice status but excuse my ignorance nonetheless!
- I'm going down the Ltd company route with JSA as my accountants
- I need to draw a monthly salary of approx £1500 to cover my outgoings & expenses
- Contract is not caught by IR35
- I will be paid monthly

I'm trying to draw up an illustration of how I will allocate the monthly remainder.
- Set by some per month for corporation tax, payable 12 mths post incorporation
- Pay myself quarterly dividends to distribute as I see fit (high interest rate savings accounts)

It would be useful for me - especially early on, to be flexible with the payment of dividends. I'm not clear on the logic behind payment quarterly (though I guess it's to do with tax).

Sorry to be a bit woolly - would just really any advice on how flexible I can be in terms of how much of the surplus (after monthly salary and set aside for corp tax) I draw down from my business a/c to ease my cash flow. For example, I have some credit cards that it'd be useful to pay off asap - ideally as soon as I get my first monthly payment.

Many thanks

[northernladuk]

Hi,

I'm soon to embark on my first contract (6mth) and have some anxieties re:cashflow. I'm sure these are quite natural given my novice status but excuse my ignorance nonetheless!
- I'm going down the Ltd company route with JSA as my accountants
- I need to draw a monthly salary of approx £1500 to cover my outgoings & expenses
- Contract is not caught by IR35
- I will be paid monthly

I'm trying to draw up an illustration of how I will allocate the monthly remainder.
- Set by some per month for corporation tax, payable 12 mths post incorporation
- Pay myself quarterly dividends to distribute as I see fit (high interest rate savings accounts)

It would be useful for me - especially early on, to be flexible with the payment of dividends. I'm not clear on the logic behind payment quarterly (though I guess it's to do with tax).

Sorry to be a bit woolly - would just really any advice on how flexible I can be in terms of how much of the surplus (after monthly salary and set aside for corp tax) I draw down from my business a/c to ease my cash flow. For example, I have some credit cards that it'd be useful to pay off asap - ideally as soon as I get my first monthly payment.

Many thanks

I am sure there will be some flaming but the best advice for you is to get an accountant to guide you through this, particularly because you have a need to make the best use of the money quickly. The last thing you want to do is to start of on the wrong foot, mix up your accounts and get yourself in a heap of trouble, not just financially but legally. We could give you a very generic overview which is just going to going to create more questions than it answers. This question is asked a lot as you can imagine so a quick search will help find more information.

Some of the big names in contract accounting would probably be the best bet SJD (who I am with and like), Nixons etc. Again there are threads on here comparing the accountants so try a search again.

Most importantly for you though is never mix up what is your money and what is the companies. You can only pay yourself what you are due regadless of the thousands of pounds sitting in your business account. This is NOT your money! It is company money. Start mixing these up and you will get in all sorts of problems, particularly if you don't get another contract after this and can't pay the HMRC and VAT man.

Again, I would say get an accountant quickly, read up on expenses and read the guides. Your accountant (if you pick one of the contractor specialist ones) will send you detailed information on what you can and can't spend and will supply you with details spreadsheets to fill in making the whole process a lot simpler.

[Rivendell]

Hi - many thanks for the reply. I dohave an accountant already- JSA. I may upgrade from the Express service to the next one up which includes all the book keeping - at least for the first few months while I get used to things. I think you're right in that I need to be directing all these questions to them, but just thought I'd see if anyone had any general info - I am mindful that people maybe loathe to provide advice based on only a basic illustration of my circumstances - especially where the penalties can be so harsh.

[Scrag Meister]

Hi,

I'm soon to embark on my first contract (6mth) and have some anxieties re:cashflow. I'm sure these are quite natural given my novice status but excuse my ignorance nonetheless!
- I'm going down the Ltd company route with JSA as my accountants
- I need to draw a monthly salary of approx £1500 to cover my outgoings & expenses
- Contract is not caught by IR35
- I will be paid monthly

I'm trying to draw up an illustration of how I will allocate the monthly remainder.
- Set by some per month for corporation tax, payable 9 months post year end
- Pay myself quarterly dividends to distribute as I see fit (high interest rate savings accounts)

It would be useful for me - especially early on, to be flexible with the payment of dividends. I'm not clear on the logic behind payment quarterly (though I guess it's to do with tax).

Sorry to be a bit woolly - would just really any advice on how flexible I can be in terms of how much of the surplus (after monthly salary and set aside for corp tax) I draw down from my business a/c to ease my cash flow. For example, I have some credit cards that it'd be useful to pay off asap - ideally as soon as I get my first monthly payment.

Many thanks

Firstly congrats on your first contract.

No mention of VAT, make sure your VAT is put to one side immediately, if you are VAT registered.

21% Corporation tax I allocate when I pay a div (net div = 79%) into my tax account. At year end 21% of the rest of the profit has to go towards CT as well.

I pay divs quarterly too, and your draw down on top of salary for c/card will be divs too.

JSA can advise you on other money related queries.

[Fred Bloggs]

If you haven't done so already, you must talk to JSA about registering for VAT under the flat rate scheme (FRS). Usually, contractors are better off under the FRS. Not registering for the FRS is throwing money away IMO.

[Rivendell]

Thanks all.

I've decided to upgrade my JSA account to the next service up which includes all book keeping. If nothing else, it will help put my mind at rest while I get used to contracting.

The alternative of course, is Umbrella co. but I have compelling reasons (aside form tax) for wanting to limit my monthly salary to as little as poss.

[VectraMan]

You can pay dividends whenever you feel like. Quarterly, monthly, daily if you want, it makes no difference.

As others have said be careful to keep CT/VAT/PAYE money seperate. You don't have to pay CT until 9 months after the company year end, so quite a long time into the future, but try not to be tempted to dip into it. A company deposit account is helpful for keeping money seperate.

And think about what happens after 6 months. Your company doesn't stop because your contract has, you'll still have an accountant to pay and in theory you ought to keep paying yourself a salary. If after 6 months your contract ends and you can't find another, and you've done what many do and empty the company of as much as possible, you won't be able to cover those bills.

Ideally you wouldn't pay any dividends until you have at least enough money to cover all the company expenses (including salary) for the year, because then it genuinely is a surplus. But nobody does that in reality, and at the end of the day, as long as you make the tax payments on time, nobody will care about how you operate.

[Rivendell]

Thanks VectraMan - deciding on which bank accounts to setup I think is key. I currently only have my Business account and personal current account. Would you recommend, for example, a Notice Business Deposit Account to set aside CT/VAT/PAYE? This way I can earn interest on the money set aside - but I'd need to be sharp about giving enough notice in order to withdraw and pay the tax man.

I understand what you say about dividends. My head says pay myself (and live off) as little as possible (at least comparable to my current perm salary) and then build up a buffer. My heart says it's high time I allowed myself the luxury of a holiday and/or some house repairs which I haven't been able to afford for a while!

[Clare@InTouch]

Thanks VectraMan - deciding on which bank accounts to setup I think is key. I currently only have my Business account and personal current account. Would you recommend, for example, a Notice Business Deposit Account to set aside CT/VAT/PAYE? This way I can earn interest on the money set aside - but I'd need to be sharp about giving enough notice in order to withdraw and pay the tax man.

I understand what you say about dividends. My head says pay myself (and live off) as little as possible (at least comparable to my current perm salary) and then build up a buffer. My heart says it's high time I allowed myself the luxury of a holiday and/or some house repairs which I haven't been able to afford for a while!

Setting up a deposit account to save for tax can make life easier, it depends on how good you are with money and how easy you'll find it to keep the money set aside if it's simply left in your current account. If you transfer a set percentage of each invoice into your savings then you know you can spend what's left in your current account without worrying about spending your Corporation Tax.

[VectraMan]

Thanks VectraMan - deciding on which bank accounts to setup I think is key. I currently only have my Business account and personal current account. Would you recommend, for example, a Notice Business Deposit Account to set aside CT/VAT/PAYE? This way I can earn interest on the money set aside - but I'd need to be sharp about giving enough notice in order to withdraw and pay the tax man.

It's a no brainer really. The money's sitting there, if you can get some interest (if you can call it that these days), then you should. You know exactly when you need it.