Profits location

[PlazaCommerce]

I've got the following currently set up:

Business account
Bills / Holding personal account
Current personal account

I get paid into my business account, then I subtract 21% from the revenue and then transfer the rest (split by salary and dividends) into my bills / holding account. This account is where all items such as mortgage payments go out of each month. Because I've been in a contract since November, this account now has funds building up.

I then "pay" myself an amount each month into my current personal account. This account is the only account I have a debit card for and is used for day to day transactions.

How do most contractors organise their finances? Do you leave most of the money in the business account and pay yourself a standard wage each month or do you pay it all (less tax) straight into your current account?

I'd just like some views really on what is best practices.

[malvolio]

I've got the following currently set up:

Business account
Bills / Holding personal account
Current personal account

I get paid into my business account, then I subtract 21% from the revenue and then transfer the rest (split by salary and dividends) into my bills / holding account. This account is where all items such as mortgage payments go out of each month. Because I've been in a contract since November, this account now has funds building up.

I then "pay" myself an amount each month into my current personal account. This account is the only account I have a debit card for and is used for day to day transactions.

How do most contractors organise their finances? Do you leave most of the money in the business account and pay yourself a standard wage each month or do you pay it all (less tax) straight into your current account?

I'd just like some views really on what is best practices.

" Best practices" is not to piss around with corporate/personal finances. There are rules about how to move money from one to the other that you have to understand. Get an accountant before you get into real trouble.

And read the guides - the one on here, the PCG guide to freelancing (Home | PCG) and the SJD one (www.sjdaccountancy,com). Then come back and ask rather more intelligent questions.

[d000hg]

" Best practices" is not to piss around with corporate/personal finances. There are rules about how to move money from one to the other that you have to understand.

He takes 79% of company income as salary & dividends, into one personal account. He then moves money between his personal accounts, granting an 'allowance' each month.
Nothing weird about that, except that 79% might be a trifle high. How you manage your personal money to 'pay yourself' is your own business.

[Olly]

Yup, you forgot to leave money in your company account to pay the VAT.
Depending on salary, there could be NI and PAYE to put into the mix.

I keep a detailed s/sheet of exactly what my company owes me in terms of salary and expenses on any day and transfer that every month or two. Dividends are once a year for me and, I only take up to the 40% band and the rest stays in the company for lean times. What I take out gets split between a current account and a high interest account and that's it. I'm saving for a house and longer term investments don't really fit the bill. Might gamble a bit on the stock market though having seen some mates do ok out of it.

...and to those who incessantly tell folks to get accounts please change the record. Accountants aren't gods and whatever they say you're far better off armed with your own research too. My paid account has made mistakes and given duff advice, if I hadn't researched on here and elsewhere I wouldn't have picked that up. I expect there are plenty of others out there in the same boat.

Accounts are just part of the mix and completely optional for most depending on how much ability and time you have yourself to invest in gaining the knowledge required.

[Craig@Clarity]

If you're taking 79% of what you receive into your company and and transferring it all to your personal account, you're probably opening up yourself to a world of hurt. Consider taking out profit after corporation tax instead. This will leave you with a provision for corporation tax, PAYE and VAT so that when it comes to paying the company bills, you have the cash there. You should also make allowances for ongoing obligations e.g. direct debits.

[malvolio]

Accounts are just part of the mix and completely optional for most depending on how much ability and time you have yourself to invest in gaining the knowledge required.

Yeah right. I wouldn't try to defend your taxation position if challenged without an audit trail, which means accurate and up-to-date accounts, be they a basic spreadsheet General Ledger or a fully detailed double-entry set. You as a director are also legally responsible for operating your company profitably, with minimum risk and in accordance with all relevant statute. Since the OP clearly has no idea of what those rules are, professional advice is probably a good starter for 10.

As I keep saying to newbies (and the occasional supposedly expert contractor), learn as much as you can since you will be surprised at how much you don't know.

[PlazaCommerce]

" Best practices" is not to piss around with corporate/personal finances. There are rules about how to move money from one to the other that you have to understand. Get an accountant before you get into real trouble.

And read the guides - the one on here, the PCG guide to freelancing (Home | PCG) and the SJD one (www.sjdaccountancy,com). Then come back and ask rather more intelligent questions.

A little harsh considering I'm actually leaving enough in the company account to pay the corporation tax bill when it arrives. Also, I'm not registered for VAT at present so don't take that into account.

Why would you leave finances that you have earned in the company account? Why not take the money out and into a personal account?

How would I get into real trouble? Explanation would be good, other than just for plugging an accountant.

[malvolio]

A little harsh considering I'm actually leaving enough in the company account to pay the corporation tax bill when it arrives. Also, I'm not registered for VAT at present so don't take that into account.

Why would you leave finances that you have earned in the company account? Why not take the money out and into a personal account?

How would I get into real trouble? Explanation would be good, other than just for plugging an accountant.

You will get into trouble if you cannot provide an audit trail for all expenditure that moves from Company to Personal accounts. The Company and You are two separate legal entities (which is why most contractors appear a little schizophrenic!), each is legally responsible for their own tax affairs and record keeping. Both are liable to penalties for getting it wrong. Get it wrong enough and bad book-keeping will be treated as evasion, and you really don't want to go there.

So while the individual sums of money may be right, you have to account for any due PAYE/NICs, Corporation Tax, VAT (when/if you pass the threshold of course) and the rest, and be able to show how it was calculated. Also any dividend payments have to come from net profits so you need to be able to show that calculated value as well else the divi will be treated as salary and liable to PAYE/NICs. And at year end you have to be able to present a set of abbreviated accounts with all this fully and correctly documented.

You can of course do it all yourself, or use a full service accountant, or simply hire one to look at your year's records and work out what goes where. But given the apparent naivety of your questions, I really wouildn't recommend doing it yourself until you know a lot more about it than you seem to know now. Hence the suggestion you go and read the guides I listed.

HTH

[rd409]

well CT is not the only thing you pay from your company account is it? You need to keep the provision for any insurance premiums, membership fees, contract review fees, Employer's NI contribution for your salary etc. The best is to maintain a monthly record of your income and expenditure, and calculate the profits after the tax. This can be then drawn as dividends.
One suggestion I would like to make here is not draw the entire amount available as dividends, and leave some (I leave 10%) in the company account, just to make sure you have enough money for unplanned expenditure. At the end of the year, if I have any room for more salary avoiding hitting the higher tax, I make a fat dividend to myself. Personal situations do differ, so you are the best person to judge how to plan your finances. Do take professional advice if you are trying to do something smart.

[TykeMerc]

A little harsh considering I'm actually leaving enough in the company account to pay the corporation tax bill when it arrives. Also, I'm not registered for VAT at present so don't take that into account.

Why would you leave finances that you have earned in the company account? Why not take the money out and into a personal account?

How would I get into real trouble? Explanation would be good, other than just for plugging an accountant.

Because the money belongs to the company and not to you, until it's been paid to you by the company of course. It's very important that you understand that the company and you are two separate legal entities.

The money can be paid to you via payroll (Employers + Employees NI's + Income Tax deducted at rates appropriate to your income) or declared dividends from retained profits or even loaned to you on a short term basis, but until the proper steps have been taken then you've failed to perform your duties as the director of a Ltd company.

Deducting 21% and paying yourself the rest without other deductions is far too simple, the tax system doesn't work that way.

I think you really need advice from an accountant as you've got to sort out what you've done in the past and set things up properly for the future as if HMRC notice what you're currently doing they'll tear you a couple of spare excretory orifices.