How Do I Build A War Chest

[jamesbrown]

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.

The additional tax due will be 25% insofar as dividends come from profits that are subject to CT. For example, as a higher rate tax payer, you'd ultimately lose 4k on an original company income of 10k when taking a net dividend of 8k, i.e. (0.2*10k)+(0.25*8k).

[muser]

Here you go...

Northern Lad,

You are simply cruel. Ok, ok.... with a little humour. Did you use to be a comic?

[northernladuk]

Northern Lad,

You are simply cruel. Ok, ok.... with a little humour. Did you use to be a comic?

I thought I was just giving a measured response inkeeping with the quality of the question asked by the OP..

[psychocandy]

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.

Yes, but in effect, if you're dividend takes you over the 40% bracket you wil pay a shedload more tax on it than if it was below.

[psychocandy]

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.

Yep. Agree.

One other thing. If you go into contractng with debts you need to balance whats best i.e pay off debts first or save.

Personally, I go for a mixture of both. Depends how much you're debts are costing you - if its low interest balance transfer there is an argument for leaving them there and keeping money in savings. Might cost you more but when debts are paid, then you suddenly have no income, and no savings, you might then have to use full rate credit cards instead.

[ChimpMaster]

In many ways I actually found it easier to save when I went contracting, due to:

1) Earning more 'hard' cash rather than receiving permie employee benefits like holidays/pension/sick pay etc.
2) Having a Ltd Co in which funds would accumulate, and not having those funds immediately accessible to me.

I was always OK at saving but the 2 points above really saw me take a leap and not only save but build a decent warchest and, beyond that, an investment vehicle.

I should also add that although my company's income was reasonably high (compared to perm salaries anyway), I did not increase my expenditure until I was comfortable, 3 or 4 years into contracting. In fact, initially I reduced my personal/family expenses because moving to contracting should be viewed as a risk, a business venture that may or may not have longevity.

In fact, I'm sure many would agree that you should ideally have a warchest before entering the contracting world.

[Nathan SJD Accountancy]

Yes, but in effect, if you're dividend takes you over the 40% bracket you wil pay a shedload more tax on it than if it was below.

Yeah definitely. I just added the minor detail in case the OP thought dividends in the higher tax bracket would be at 40%.

[Nathan SJD Accountancy]

The additional tax due will be 25% insofar as dividends come from profits that are subject to CT. For example, as a higher rate tax payer, you'd ultimately lose 4k on an original company income of 10k when taking a net dividend of 8k, i.e. (0.2*10k)+(0.25*8k).

That is true in the scenario above. But it is always good to remember that the company tax bill is completely separate from a personal tax bill. However, I do understand where you are coming from.

[jamesbrown]

That is true in the scenario above. But it is always good to remember that the company tax bill is completely separate from a personal tax bill.

Indeed -and I appreciate that you know all this better than I - I just thought it worth clarifying, as others might infer that the 25% was the overall tax due on the high-rate dividend, when it is the additional, personal, tax due. Of course, comparing permie and contractor tax is a somewhat artificial comparison to begin with but, given that, I think total tax matters.

[Scrag Meister]

Treasure chest, Storage chest? The OP wants a War Chest.

Just don't spend too much, I always plan to have enough to live for 1-2 years without a cut in quality of life.

If you move from Perm to Contract and can't save then there is something VERY wrong with your financial management.

GL.