How Do I Build A War Chest

[Pondlife]

For the 1st year or so keep your spending as it was when permie. Take only what you need in divs if possible only up to the higher rate limit. If need be look at making Mr(s) OP a shareholder. BUT ALWAYS ensure you leave enough in the company to pay your liabilities, VAT, Corp tax, PAYE, Accountant etc. If you do this for a year and you have nothing left over and haven't being paying off any bad debts and using your ISA allowance woth the money you've taken out you are spending too much. Once you get to the point where you can exist on your salary/divs without credit cards or bad debt (car/personal loans for depreciating assets) you can start to build your warchest.

Different people have different preferences on whether to leave the money in Your Co for a rainy day or to take it out as divs over the higher rate. Talk to your accountant about what's possible as the rules change and (IMHO) there is no longer a definitive answer.

Just my £0.02

[hyperD]

Oh, and if warchest is your goal, don't get married*. Seriously.

*in the UK.

[Ignis Fatuus]

I am hoping for some advice on building up a war chest. In permie land I was never one for saving. First invoice should be paid to MyCo Friday and would like to start as I mean to go on.

Perhaps the answer is simple, just leave cash in the company account to cover quiet periods on the bench. I just don't know???

Definitely start as you mean to go on, and then go on like that.

Don't even think of all the Ltd Co's money as yours.

The suggestion to spend as much as you did before (apart from paying debt) is a good one. Hyour Ltd Co pay you a salary = what you got before. Then after keeping mony aside for taxes (that's definitely not your money to spend), you should have a positive balance in the Ltd Co every month.

Modify depending on circumstances (e.g. if you have loads of credit card debt at 27% and you have suddenly got a good rate, it might not be sensible to build a warchest at 0% interest while paying 27% on your debt).

Yes it's simple, spend less than you earn. Not so simple is how to make sure that happens.

[LisaContractorUmbrella]

Hire a good accountant and then listen to their advice

[NotAllThere]

He's not had his morning coffee, so he's a bit grumpy this morning.

[psychocandy]

Take out in dividends etc as much as you can up to the 40% tax bracket. Dont spend it all and put it into a savings account. Dont take out more than the 40% bracket unless you really have to or it'll go in tax (i.e. 40%).

Leave the rest in company account to be distributed when you need it. If you can find a business account that pays interest all the better.

Never understood why some people leave all their warchest in company account. Surely you're better off withdrawing it personally (up to tax bracket) each year? Of course, assuming you can trust yourself not to spend it all.

[Nathan SJD Accountancy]

Take out in dividends etc as much as you can up to the 40% tax bracket. Dont spend it all and put it into a savings account. Dont take out more than the 40% bracket unless you really have to or it'll go in tax (i.e. 40%).

Leave the rest in company account to be distributed when you need it. If you can find a business account that pays interest all the better.

Never understood why some people leave all their warchest in company account. Surely you're better off withdrawing it personally (up to tax bracket) each year? Of course, assuming you can trust yourself not to spend it all.

Just to add and clear up any confusion. If the income you receive as dividends is in the higher tax bracket, the tax due will be 25%, not 40%. The 40% tax in the high tax bracket applies where the income in that higher tax bracket is employment (e.g. salary) or savings income (e.g. bank interest).

A dividend is investment income which has a lower tax rate compared to employment and savings income.

[doomage]

I've only been contracting a few years, but if I had any advice to give for a new contractor it would be to get disciplined about the warchest as soon as possible.

The mechanics of how you do it (divis / isa / company savings) aren't that relevant. What is important is setting your target and doing whatever you can to get there as soon as possible. So set an amount to put aside each month and make that non negotiable. If you have to set up a standing order to another account then do it. Setting a target will also focus your efforts, it makes it easier to say no to unnecessary spending (I'm looking at you, array of unused gadgets )

This also means don't splash your income on suspect 'expenses' (laptops, fancy phones etc) until you have achieved your warchest target level. Forgo holidays if you can, these are doubly expensive.

The target is up to you, but a warchest is more than just to pay out when you are benched. It is also peace of mind, and for your business it means being able to choose suitable contracts, hopefully the good ones that lead to better ones with higher rates or more interesting work.

[northernladuk]

Here you go...

[The Spartan]

What doomage said, in a nutshell really