newish contractor in the UK - advice on surplus cash in business bank account

**northernladuk** · 5 September 2013, 15:10

Originally posted by dcx View Post

Hi All,

great forum, wish i knew about this place a year ago

Apologies if this is in the wrong sub-forum, but i have a question about my situation and would like to be more informed before i approach my accountant.

I moved to the UK 1.5 years ago and have been contracting since I arrived here. I am previously from Australia where i have been contracting for 9 years)

I have a limited company, an accountant, and a contract outside of IR35. I am paying myself minimum wage with dividends. Last year my gross dividends were 55K

I currently have 20K surplus in my company account in a HSBC business money manager account at an extremely low rate which is annoying.

My wife earns 30K a year and will go on maternity leave in a couple of months.

I plan to leave the UK in a few years, but may stay longer

Should I:
a) look for a better business account to earn more interest
b) pay my wife dividends
c) wait until i close the company then take the cash
d) ?other options?

Thanks in advance

There are not many other bank accounts that earn anything worth talking about. Santander do a business saver at about 1% but that is about it. We are all stuck with that one.
Your wife has probably used up her tax allowance so wouldn't have thought it worth doing that. Changing your shares to fit her in and then changing back later will flag you to HMRC. It is not a good idea to change shareholding regularly as it looks like you are trying to aggressively avoid tax (which is exactly what you are doing)

Probably C as there are options to take out some at a lower rate of tax. Search MVL or liquidation on this forum and you will find the info.

Just out of interest why 55k in dividends? You are already exceeding the lowest tax level or do you withdraw what you need to live rather than trying to stay under the lowest threshold?

If you have an accountant see what he says. He may spot something in your figures or from knowing your personal situation that could help.

Oh also, do you have a warchest? Is this savings that you have already withdrawn? Everyone seems to advise keeping 3-9 months spare cash in case you don't get a contract. If you haven't got savings etc to fall back on this 20k is well worth leaving alone for a rainy day.

**Clare@InTouch** · 5 September 2013, 15:11

It's impossible to answer without knowing more details about your and your wife's full position really.

If your wife is on maternity leave and won't be going back to work in this tax year, and has earned less than £41k, it might be worth gifting her shares and paying her dividends. You'd have to structure it correctly to get the proportions right though. If she's not working at all next tax year, and has no other income, then absolutely worth it (along with a salary - her being an officer or employee can be beneficial from a capital gains point for view too).

Saving the money and then closing down via liquidation can be a great option in the UK, but how would a capital gain be taxed in Aus? You need to find an Aus accountant and ask him before you decide on that route.

Have you considered a pension? Not sure how it works if you move abroad, but worth looking into.

Talk to an IFA in regard to investments, bonds and other bank accounts too.

You could also pay your CT early and get interest from HMRC, if you're within a reasonable time of your year end and owe a fair amount. 0.5% is better than some banks!

**Martin at NixonWilliams** · 5 September 2013, 15:18

Originally posted by dcx View Post

Should I:
a) look for a better business account to earn more interest
b) pay my wife dividends
c) wait until i close the company then take the cash
d) ?other options?

You could improve yours and your wife's combined take home pay by gifting some of your shares. If you are doing this you ought to consider your wifes income and arrange a share split that takes her earnings towards the higher rate threshold (£41,450 for 2013/14). Based on her earnings of £30,000, you would need to gift enough of the shares to take a £11,150 gross dividend (£10,035 net). If you plan on taking dividends of £55,000 in a year this is roughly 20% of the shares.

As you have probably already declared dividends in 2013/14, a 20% holding will not necessarily achieve what you want it to for the current year. You could transfer a higher percentage of the shares for this year alone but I would advise against this as performing multiple transfers of shares for tax avoidance purposes alone can weaken your argument against income shifting should a challenge arise.

Waiting until you close the company could prove to be advantageous but you could still transfer shares to your wife. The general approach to this is to cap your earnings at the higher rate threshold and save funds in the company, providing you are eligible for entrepreneurs relief this allows you to take the remaining funds in the company when it closes at a rate of 10%. You and your wife could also be eligible for a capital gains free allowance of £10,900 but you may not be entitled to this depending on your residency status for tax purposes in the year of disposal.

Given the numbers we are talking about interest isn't really worth the hassle of opening another account.

I hope this helps.

Martin

**TheCyclingProgrammer** · 5 September 2013, 15:25

I wouldn't bother trying to earn interest on it. It's not worth it.

Making your wife a shareholder and distributing extra funds to her using dividends might be an option, if you need to get the money out of the company now, but talk to an accountant first on how to do this properly (trust me on this one). As NLUK says, you don't want to be changing shareholdings around all the time; if you go down this route, you should consider it a permanent change (and remember the dividends will be your wife's, not yours).

Personally, I'd like to always keep a minimum of 6 months funds (retained profit) available to cover any regular dividend payments I take in the event that I'm unable to find work (not counting any personal savings I may have). Depends on your day rate and your regular outgoings.

If it was me, and I didn't need the money now, I'd leave it where it is. If you leave the country and wind the company up, you can deal with extracting the leftover funds then.

**dcx** · 5 September 2013, 15:50

Originally posted by northernladuk View Post

There are not many other bank accounts that earn anything worth talking about. Santander do a business saver at about 1% but that is about it. We are all stuck with that one.
Your wife has probably used up her tax allowance so wouldn't have thought it worth doing that. Changing your shares to fit her in and then changing back later will flag you to HMRC. It is not a good idea to change shareholding regularly as it looks like you are trying to aggressively avoid tax (which is exactly what you are doing)

Probably C as there are options to take out some at a lower rate of tax. Search MVL or liquidation on this forum and you will find the info.

Just out of interest why 55k in dividends? You are already exceeding the lowest tax level or do you withdraw what you need to live rather than trying to stay under the lowest threshold?

If you have an accountant see what he says. He may spot something in your figures or from knowing your personal situation that could help.

Oh also, do you have a warchest? Is this savings that you have already withdrawn? Everyone seems to advise keeping 3-9 months spare cash in case you don't get a contract. If you haven't got savings etc to fall back on this 20k is well worth leaving alone for a rainy day.

thanks for your reply, it's very helpful

about the 55K, that is my gross dividend minus 5K in tax credits gives me a dividend payable of 50K...i'm not really sure what the implications of this are, or what amount it should be, it's just what my account sent me. Any info on this would appreciated...

As for a warchest, it is a wise idea. But how would it work in practice? If I was out of work for 6 months can I just simply keep paying myself dividends?

**dcx** · 5 September 2013, 15:52

wow, thanks for the considered responses everyone...a lot of information for me to digest/research

it looks like leaving the cash in the company might be the easiest thing to do as I don't specifically need the money at the moment (I would just put it on my mortgage), but i will definitely research the other suggestions in this thread

cheers!

**Clare@InTouch** · 5 September 2013, 15:54

Originally posted by dcx View Post

thanks for your reply, it's very helpful

about the 55K, that is my gross dividend minus 5K in tax credits gives me a dividend payable of 50K...i'm not really sure what the implications of this are, or what amount it should be, it's just what my account sent me. Any info on this would appreciated...

As for a warchest, it is a wise idea. But how would it work in practice? If I was out of work for 6 months can I just simply keep paying myself dividends?

It depends on what your other income is - what salary did you have, and do you have bank interest, foreign income, rental income, other salary, self employment etc?

In the current tax year you could take a salary of £641 per month and net dividends of £30,000 and, assuming no other income, pay no tax. Anything above £30,000 would lead to a tax liability of 25% of the excess.

**TheCyclingProgrammer** · 5 September 2013, 16:07

Originally posted by dcx View Post

it looks like leaving the cash in the company might be the easiest thing to do as I don't specifically need the money at the moment (I would just put it on my mortgage), but i will definitely research the other suggestions in this thread

If you would only put it into your mortgage, then a simple calculation presents itself...would the savings in mortgage interest outweigh the increased tax cost if you took the money now (as opposed to later when you're out of work and could possibly take the money without paying extra tax)? Factor in the added security of keeping the money around. Then you have your answer.

And yes, of course you can keep paying yourself dividends when you're not on a contract (but only if the company has enough retained profit).

**dcx** · 5 September 2013, 16:11

Originally posted by Clare@InTouch View Post

It depends on what your other income is - what salary did you have, and do you have bank interest, foreign income, rental income, other salary, self employment etc?

In the current tax year you could take a salary of £641 per month and net dividends of £30,000 and, assuming no other income, pay no tax. Anything above £30,000 would lead to a tax liability of 25% of the excess.

Looking at my documents from last year I paid myself about £690 / month. Which makes sense because I did my personal tax self assessment and have to pay about ~£5-6K (25% of 20K).

My foreign income is slightly negative as i have property overseas. (I assume I can't do anything with this in the UK however)

newish contractor in the UK - advice on surplus cash in business bank account