Decent level of retained profit, dividend timing?

[TheCyclingProgrammer]

Just looking for some advice generally about what to do with a decent amount of retained profit in the company bank account.

Some background: company shares are split 75/25 between my partner and I. Partner doesn't work and has no other income. I pay a regular quarterly dividend of £10k, which incurs no extra tax for my partner or myself and with my salary, takes me up to the higher tax threshold. This in itself is enough to live on with some room for additional saving. It does mean that over the last 5 years and after a particularly good year last year, that my company reserves have reached £65k.

We plan to buy our first house some time in 2015 and will fund our deposit from our existing savings plus an additional one-off dividend (on which I will pay higher rate tax). I've been umming and ahhing over whether or not to pay the one-off dividend now or wait.

I've been waiting, mainly because I'm stuck in the mentality of enjoying a large, untaxed war chest (e.g. enough to continue funding our regular dividend payments for the next 18 months). If I'm being honest though, I probably could have been a lot smarter about this!

In reality, work is good enough that a 6 month war chest in the company account is probably OK. If I was to pay the rest out as a large dividend now, it's not like that money is going to disappear and would still be available in a savings account until we actually buy a house, should everything go tits up. The only difference between paying it out now and leaving it in the company war chest is that paying it now commits me to paying the higher rate tax bill on it.

Savings rates are rubbish right now; the savings account attached to my First Direct current account pays 0.25% AER and their normal saver account between 1.2% and 1.6% AER. It hardly seems worth it. On the other hand, they do have a savings account that pays 6% AER up to £3600 if you leave it in the bank for the year.

If you were in my position, would you leave the money in the company, or pay the dividend and stick it all in one or multiple savings accounts. I might not be able to spend a portion of it (earmarked for the tax bill) but at least I can earn interest on it until the tax is due? It's been a while since Ive had to pay any extra tax through my SA - if I took the dividend now, when would the tax be due and would there be payments on account on top?

Edit to say: with my current level of profit, it seems tempting to close the company down and take the capital distribution but as I intend to continue trading I'm not sure this is really something I can get away with (and my accountant agrees). I'm also not sure the £8k saving is worth the additional stress in taking the risk!

[DirtyDog]

On the other hand, they do have a savings account that pays 6% AER up to £3600 if you leave it in the bank for the year.

Not quite - they have a regular saver account, where you put in £300 a month and they pay 6% AER on the balance. So you don't get 6% on £3600, it's less than that.

If you are always going to be a higher rate tax payer, then the only reason to delay it is if the tax bands change in April.

I think I'd take it out and (if you know that you're going to need it handy) stick £5740 in a decent cash ISA (Virgin Money seem top of the table last time I looked), and the rest in a Virgin Money easy access savings account. May as well have you earning a pittance on it than having the company earning a pittance on it.

[jamesbrown]

In terms of the warchest, it isn't really a warchest if it's extracted and earmarked, so make sure you do actually retain a reasonable warchest. I'd look to have a year of outgoings at least, but YMMV. There's not much you can do about the savings rates, but some of the current accounts offer better rates than deposit accounts (for example, Santander 123 offer 3% on balances up to 20k with a small account admin fee of 2 quid per month) and you may want to max out your ISA allowance. If it's intended for a house deposit, you probably don't want to mess with stocks and shares, but that's where the decent returns are available and you have an annual CGT allowance (any dividends would be taxed).

[TheCyclingProgrammer]

Not quite - they have a regular saver account, where you put in £300 a month and they pay 6% AER on the balance. So you don't get 6% on £3600, it's less than that.

Well, there had to be a catch.

If you are always going to be a higher rate tax payer, then the only reason to delay it is if the tax bands change in April.

Generally, I won't be - the only time I'm going to pay the higher rate is in situations like this, where I've built up enough of reserve funds *and* need access to them. Generally we can live on what we take up to the higher rate and I'm happy to leave the war chest in the company account.

I think I'd take it out and (if you know that you're going to need it handy) stick £5740 in a decent cash ISA (Virgin Money seem top of the table last time I looked), and the rest in a Virgin Money easy access savings account. May as well have you earning a pittance on it than having the company earning a pittance on it.

Forgot to mention, I do currently have a cash ISA which I put money into last year and haven't yet used this years ISA allowance, but I seem to remember there being a catch about having to leave the money in for 2 years to qualify for the rate I was given. That was with Santander. I'll look at Virgin Money.

[TheCyclingProgrammer]

In terms of the warchest, it isn't really a warchest if it's extracted and earmarked, so make sure you do actually retain a reasonable war chest.

I appreciate what you're saying; that's probably part of the reason why I've preferred to leave it in the company account up until now.

That said, it might be earmarked for a deposit on a house but if things got desperate and I wasn't able to find work (contract or otherwise) then a house purchase would probably be the first thing off the list!

I'd look to have a year of outgoings at least, but YMMV. There's not much you can do about the savings rates, but some of the current accounts offer better rates than deposit accounts (for example, Santander 123 offer 3% on balances up to 20k with a small account admin fee of 2 quid per month) and you may want to max out your ISA allowance. If it's intended for a house deposit, you probably don't want to mess with stocks and shares, but that's where the decent returns are available and you have an annual CGT allowance (any dividends would be taxed).

In terms of safety net, we do both have about £20k sitting in a joint account and I also have just under £6k in an ISA, in addition to what's in the company currently. Most of that £20k is also earmarked for the house deposit but again, it doesn't have to be if things get bad (just thinking about worst case scenarios).

Is there any downside to opening multiple current accounts and spreading the money around?

[TheCyclingProgrammer]

One other upside to having the money available is in case we change our mind and decide to bring our house purchase forward and start looking this year. I really want to have as high a deposit as possible (20-25%, on a property up to £250k) but my partner insists we don't need to have that much and that 15% would probably be fine (assuming we can find a lender willing to lend at least £200k - might need to go through a contractor mortgage specialist to get that much).

The timing of buying the house is awkward because our daughter starts school in September 2015 but we need to start applying this September and we *really* don't want to be living where we currently are when she starts school - but if we moved in the middle of next year we're going to be faced with late applications. It's a right PITA.

[DirtyDog]

Is there any downside to opening multiple current accounts and spreading the money around?

Only remembering where the money is kept - and, more importantly, that someone else does in case you get hit by a bus!!

Also, it's worth checking which banks are owned by which, and making sure that you don't have more than £85k in one place as that would be above the bailout threshold when things go tits up again.

[TheCyclingProgrammer]

Only remembering where the money is kept - and, more importantly, that someone else does in case you get hit by a bus!!

I use YNAB to keep track of my finances so no worries there.

Also, it's worth checking which banks are owned by which, and making sure that you don't have more than £85k in one place as that would be above the bailout threshold when things go tits up again.

Unfortunately I don't quite have that much money, but good point nonetheless.

Having said all this, even if I do make a pitiful amount of interest, I'm likely going to end up paying 40% interest on it, unless I "gift" the post-tax amount to my partner and put the savings in her name.

[jamesbrown]

One other upside to having the money available is in case we change our mind and decide to bring our house purchase forward and start looking this year. I really want to have as high a deposit as possible (20-25%, on a property up to £250k) but my partner insists we don't need to have that much and that 15% would probably be fine (assuming we can find a lender willing to lend at least £200k - might need to go through a contractor mortgage specialist to get that much).

The timing of buying the house is awkward because our daughter starts school in September 2015 but we need to start applying this September and we *really* don't want to be living where we currently are when she starts school - but if we moved in the middle of next year we're going to be faced with late applications. It's a right PITA.

Not that I'd place too much stock in consensus predictions about the housing market, but bear in mind that your extra deposit could get eaten up pretty quickly by price rises. In other words, I wouldn't necessarily rely on your forward projections for deposit %, unless you're willing to downgrade your expectations about what you can get for a fixed amount (I guess you're aiming for 250k because of the SDT). Also, fixed rate mortgages are going to be heading up from here, probably within the timeframe that you're talking about. Yes, 200k borrowing is probably achievable through a contractor mortgage specialist; no harm in talking to various people and crunching some numbers for a 15% versus a 20% deposit, bearing in mind the possible changes in market conditions a year from now.

[TheCyclingProgrammer]

Not that I'd place too much stock in consensus predictions about the housing market, but bear in mind that your extra deposit could get eaten up pretty quickly by price rises. In other words, I wouldn't necessarily rely on your forward projections for deposit %, unless you're willing to downgrade your expectations about what you can get for a fixed amount (I guess you're aiming for 250k because of the SDT). Also, fixed rate mortgages are going to be heading up from here, probably within the timeframe that you're talking about. Yes, 200k borrowing is probably achievable through a contractor mortgage specialist; no harm in talking to various people and crunching some numbers for a 15% versus a 20% deposit, bearing in mind the possible changes in market conditions a year from now.

I've started to think along these lines, especially with the movement in the market over the last 6 months or so.

I was hopeful to get a mortgage through my current bank (First Direct) as they offer very good fixed term rates although according to their calculator the most they'd lend based on our joint income is £192k (and that's if they'd even lend to me).

You're right, maybe I should start number crunching. It would be nice to actually move this year and avoid the faff of late school applications.