Decent level of retained profit, dividend timing?

[GB9]

If you are getting a mortgage have you considered an offset one? I put most of my divis in there with the added benefit of using the tax payment for a few months until it is due.

[psychocandy]

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!

OK. Assuming partner is female and you are indeed married. (although not sure if same sex marriage counts though?)

So why the 75/25 split rather than 50/50?

So, am I right in saying, your income annually is 4x £7500 plus salary, whereas partner is 4x £2500 = £10K?

Wasting a lot of the partners lower tax bracket allowance here. If you split it 50/50 so that her/his income was approaching yours it'd be more you get out before hitting 40%.

Whereas now you're taking out £40K now in dividends, you could be taking out £60K if you split it evenly. You'd get £30 divis and so would the spouse. With your setup, if you declared another £20K (assuming your right on the bracket now), you'd pay extra on your £15K (can't remember what it is - 21.5% or something?) so a fair chunk of tax.

Of course, fannying around with share splits is not something most people recommend too often but I think general consensus is that a 50/50 split between MARRIED partners is OK.

Think I'm right here at least... Works well for me doing this. Wife works part-time so her salary is about equal to mine which means we both go pretty close to tax bracket fairly evenly.

If you're not married ignore it all above!

[TheCyclingProgrammer]

OK. Assuming partner is female and you are indeed married. (although not sure if same sex marriage counts though?)

So why the 75/25 split rather than 50/50?

Not married yet. We get married in April (you don't need to talk to me about settlements legislation and I really can't be arsed to discuss it on here again!).

75/25 made sense for our situation and aligned with how much I wanted to take out of the company each year. In addition, because we're not married and because of potential (albeit low) risks of the aforementioned settlements rules, I was erring on the side of caution and did not want to be too aggressive with the split.

I realise this isn't maximising our tax savings. I could transfer an additional 25% to her after we get married but I'm not really interested in messing about and potentially drawing more attention to ourselves so I'm not going to change it.

[DirtyDog]

OK. Assuming partner is female and you are indeed married. (although not sure if same sex marriage counts though?)

So why the 75/25 split rather than 50/50?

They aren't. Please, for goodness sake, don't let this thread go off on his take on Arctic and income splitting

[TheCyclingProgrammer]

If you are getting a mortgage have you considered an offset one? I put most of my divis in there with the added benefit of using the tax payment for a few months until it is due.

Maybe in the future, but after forking out for the deposit our savings will be minimal (not counting the war chest left in the company account) and it will take us a few years to start building them up again.

My current thinking, if we do get a mortgage this year, is to take on a 5 year fixed that allows overpayments without penalty, then maybe consider an offset after the term is up.

[TheCyclingProgrammer]

They aren't. Please, for goodness sake, don't let this thread go off on his take on Arctic and income splitting

Don't worry, I think I'll be taking the NLUK approach to this one going forward *cough search*

[TheCyclingProgrammer]

This is going off on a tangent slightly, but I've just been looking at First Direct's mortgage deals again. If we could find a property for £240k with a 40k deposit, that would give us an 83% LTV, which doesn't seem too bad. At this level, First Direct offer a 5 year fixed deal of 3.9% fee free (£954 monthly repayment) or 2 years at 3.7% (£897 monthly) on a 30 year term which both seem reasonable, and within my ideal £1000/month repayment maximum budget.

Entering our joint income figures into their borrowing calculator yields a maximum figure of £200k and hopefully with 5 years worth of accounts under my belt obtaining that should be do-able.

Not sure if I'd get a better deal through a contractor mortgage specialist so I'd have to investigate further.

[TheCyclingProgrammer]

Sorry, I realise this is diverging a bit now, but does anybody else know what impact my partner's lack of credit rating would have on any our application? We don't know what my partners credit rating is like so we ought to check, but I'm assuming it's not going to be high due to her lack of credit - she has no credit card and most of the bills are in my name. My credit score is excellent, if it helps (999 with Experian).

I'm wondering if it would be worth trying to get an agreement in principle out of First Direct.

[TheCyclingProgrammer]

Just got off the phone with First Direct - had an informal chat with one of their mortgage advisors. After discussing the situation, he said that in my situation, they wouldn't look at dividends, but would use a combination of salary and net profit after tax, averaged out over the last 3 years.

On that basis he told me that the maximum they would lend would be about £210k, and informally he said it looked like a good possibility that they would be able to lend, pending eligibility checks etc. If I wanted to come back and get an agreement in principle, it would last for 6 months.

Looks like my partner and I have got some thinking to do. Thanks for all the advice everyone - I'm leaning towards just taking the extra dividend now although I'm waiting for my accountants advice before making a final decision.

Now I just need to try and secure enough work to ensure this year is as successful as last year!

[BillHicksRIP]

Say you do take out a large chunk, what % of it would be reasonable to set aside for your future tax bill, assuming your past few years income has been ~50k?