Understanding finances

**TykeMerc** · 9 March 2011, 10:56

I don't like paying higher rate tax, so I leave it in the business.
That way it's there if I have a quiet year or just decide to take an extended break and I carry on paying salary and drawing dividends from the stockpiled cash.

If you want to draw it from the business and pass the thresholds you're aware of in year then there's tax to pay at the higher rate on what you draw.

**SimonMac** · 9 March 2011, 11:12

If you have a spouse, you could make them a share holder and thus allow them to draw dividends too upto the tax free limit

**SueEllen** · 9 March 2011, 11:34

Originally posted by bluedrop View Post

What happens to the 57k? My corporation tax will be say 21k (21% flat? Please correct me if I am wrong). Remaining 36k - does it just sit in my business account ? Do I pay extra tax to get it out? What do contractors usually do? Just let it sit in there or pull it out and invest it somewhere?

People leave it in the business account.* It's what we call on here a "warchest".

That means if you have a period which could last up to two years where you don't have a contract for any reason be it personal i.e. illness of you or someone in the family, or due to the economy, you can draw the money out as salary and dividends.

One mistake new contractors often make is viewing all the money in they receive as money they should immediately draw on. The simple advice is don't. Try and learn to live on as minimal money as you can then once you have a warchest that covers you for say a year talk to your accountant about the best ways of getting the money out with a short term and long term view.

*Business account means anything that in the business name so may be a business savings account, business investment bond.

**Wanderer** · 9 March 2011, 11:51

Originally posted by bluedrop View Post

Remaining 36k - does it just sit in my business account ? Do I pay extra tax to get it out? What do contractors usually do? Just let it sit in there or pull it out and invest it somewhere?

It sits in the company account as "retained profits". If the you declare them as a dividend then you have to pay extra personal tax because you are now a higher rate tax payer.

What do people do?

1. Defer paying a dividend, retain the money in the company for a rainy day ("warchest"), probably earning a rubbish rate of interest.

If your company's income dips below the higher rate threshold in a subsequent personal tax year (say, due to unemployment, holiday, illness, change of business etc) then take the money out then.

2. If you have a spouse with no income then make them a shareholder and pay them £47k which takes up to the higher rate rate.

3. Retain the money indefinitely and then eventually close down the business (say you go permie or quit working in your usual line of business) and apply for ESC-C16 which means you can pay less tax.

4. Use the money as capital investment to expand your business into other areas or to set up some sort of plan B business.

5. Put it in a pension

6. Pay it to someone you want to support. You can't do this and have them give you the cash straight back, nor should you benefit from it in any way. Not 100% sure about the legality of this but if you wanted to support your parents in their old age, could you make them shareholders and pay them dividends?

**DeludedAussie** · 10 March 2011, 13:27

Originally posted by Wanderer View Post

6. Pay it to someone you want to support. You can't do this and have them give you the cash straight back, nor should you benefit from it in any way. Not 100% sure about the legality of this but if you wanted to support your parents in their old age, could you make them shareholders and pay them dividends?

Its exactly what I thought - I wonder if this is allowed?

**SueEllen** · 10 March 2011, 13:32

Originally posted by DeludedAussie View Post

Its exactly what I thought - I wonder if this is allowed?

Why wouldn't it be allowed?

They buy the shares. You give them dividends.

**northernladuk** · 10 March 2011, 13:38

Originally posted by SueEllen View Post

Why wouldn't it be allowed?

They buy the shares. You give them dividends.

Remember though if you give them dividends and they give you it straight back you are right up tulip creek without a paddle if you get found out.

This method is to support people from you Co... Not for you limit your tax liabilities by using someone elses and getting it back behind HMRC's back.

I bet most people considering this have no intentions for giving their hard earned cash away through dividends but have it mind to get more out cheaper. There is a big difference.

**Wanderer** · 10 March 2011, 14:53

Originally posted by northernladuk View Post

Remember though if you give them dividends and they give you it straight back you are right up tulip creek without a paddle if you get found out.

Absolutely. You can't use them to launder the money back to your pocket.

There may be something under the "settlements" legislation about this but I think that as long as it's an unconditional gift then you are OK. You may want to make a special class of share so you can decided exactly how much dividend this shareholder gets (if any) as the company's circumstances change.

Originally posted by northernladuk View Post

I bet most people considering this have no intentions for giving their hard earned cash away through dividends but have it mind to get more out cheaper. There is a big difference.

Yes, it may be open to abuse. Imagine if you paid your grandmother a nice dividend that she used to buy a BMW M3 which you would use to drive her to the shops. And borrow. Quite often.

A good many people do genuinely support other people though so this MAY be an option... INAA

**northernladuk** · 10 March 2011, 15:10

Originally posted by Wanderer View Post

Yes, it may be open to abuse. Imagine if you paid your grandmother a nice dividend that she used to buy a BMW M3 which you would use to drive her to the shops. And borrow. Quite often.

A good many people do genuinely support other people though so this MAY be an option... INAA

The fact that this option is always discussed in threads that are about tax limitation and other fudges says it all for me.
If you genuinely wanted to support family, give away your hard earned cash for nothing would have occured to you at a different time and topic.

Very generalistic view but everytime this tax limitation question comes up this ALWAYS gets mentioned and someone gets excited about it.

EDIT : thinking about it the last few times has been Deluded Aussie....

Understanding finances