High Interest Account Question

[weemster]

Why do people draw money from their business account to put into
a high interest account. I thought that the cost of the taxation
(assuming they took dividends) greatly outweighed the interest gain
on any account.

[NewBoy]

Good question...

I guess that if I make a £50k net profit this year and decide to leave in the company for the next 5 years, I would still be subject to dividend tax when I take it out so would lose £11k of it and end up with £39k.

If on the other hand I take it out this year and pay that £11k and then put it into a high interest account earning 5% for arguements sake...then in 5 years time it will be worth £49.5k

My maths is rubbish and I'm new to this so I'm sure my accountant would cringe at any advice I give, but this is why I would do it if I did it!

P.S. I know that Taper Relief would change this but I don't really understand that and I don't want to close my company every couple of years either.

[weemster]

Newboy - Thanks for your take on it - I'm new to this too (well been contracting for two year anyway). I think accountants in the main
don't like you to spend money (mine certainly doesn't anyway).

[IR35 Avoider]

I guess that if I make a £50k net profit this year and decide to leave in the company for the next 5 years, I would still be subject to dividend tax when I take it out so would lose £11k of it and end up with £39k.

Not sure what you mean by "dividend tax." Higher rate tax on the dividends?

Corporation tax will not be affected by when you take the dividends.

I think that generally the optimum strategy is to pay sufficient dividends to take your total personal tax bill for the year up to the point that higher rate tax kicks in. Leave the rest of the money in the company to be taken out in a later year. If you wait for a year when you can take it out without paying higher rate tax then there will be no more tax to pay. Of course tax rules can change though. If you are not 100% sure you are immune from IR35, or want to keep things simple, or don't trust Gordon Brown not to do something nasty like introducing NI on dividends, then consider bunging the rest as a company contribution into a pension scheme. (This will reduce your IR35 bill if your judgement that you were outside turns out to have been over-optimistic.)

Savings accounts for companies offer less choice and worse rates than ones for individuals, but the difference isn't so great that it should affect when you pay dividends. I've addressed this issue by having company money in a high yield bond fund for a few years. Obviously this is riskier than a savings account, but four years later my capital is slightly up and I've had income well above 5% a year during the whole period. I think the bond fund was bought via discount brokers Canvendish Direct to avoid front-end charges.