Paying off mortgage VS High Earnings Tax

[ASB]

Argggh! Yes you're right, I thought about it when I was writing and actually mistyped.

Still the principal is still one of the most tax efficient ways of getting current disposal funds to the OP. I would much rather do this and use a lump sum to pay off the mortgage than put large sums into a pension that I might never see.

Notwithstanding the CGT changes there is the *potential* problem that the current ESC16 is in the gift of the inspector and he might take the view that doing it more than once is not to be permitted.

[ChimpMaster]

No - that's definitely wrong.

You are correct that CGT is fixed at 18% post April put this is a lot worse that it is currently as a company owned for > 2 years qualifies as a business asset and is eligible for 75% taper relief
.....snip

Argggh! Yes you're right, I thought about it when I was writing and actually mistyped.

Still the principal is still one of the most tax efficient ways of getting current disposal funds to the OP. I would much rather do this and use a lump sum to pay off the mortgage than put large sums into a pension that I might never see.

[chris79]

It's possible to plot out your mortgage repayment over the term in excel month by month, then work out on a yearly basis how much interest totalled this costs you for the debt you have.

You can then work out scenario B which shows how much your debt is costing you if you pay off a chunk using money paid from higher rate tax.

The best option will be if your interest savings outweigh the penalty of higher rate tax, but I'm sure thinking of this logically in my head there will be a crossover point where it is not beneficial to use higher rate tax to pay off debt. This is where excel will show you the cost savings if you map it all out correctly so you can make your own judgement on a month by month basis. It will obviously be more beneficial to pay large chunks off 'sooner' rather than 'later' due to the cumulative effect of interest over time. It gets a bit more complicated if you factor in inflation as well as interest paid on your business funds etc.. but nothing you can't map out over the course of an afternoon?

[minstrel]

If you do this post April '08 I believe it will work out more beneficial to you as the CGT rate will be fixed at 18%.

No - that's definitely wrong.

You are correct that CGT is fixed at 18% post April put this is a lot worse that it is currently as a company owned for > 2 years qualifies as a business asset and is eligible for 75% taper relief.

E.g. If you've got £100k in the business:

this year £100k - 75% = £25k. Minus £9,200 CGT allowance = taxible income of £15,800 = £3,476 tax due (basic rate tax payer)

next year tax due = £100k - £9,200 (or whatever it is next year) @ 18% = £16,344.

If OP has held his company > 2 years probably best to close down before April and take a capital distribution.

[moorfield]

Agreed. If you have a large mortgage over a long term then restricting your income to 37 odd k to save tax seems to be cutting off your nose to spite your face.
With the exception of keeping a 1 year safety net for salary provision etc, I'll extract the maximum possible from my company until my mortgage is paid off, or at least insignificant.
At that point you will be a huge step closer to financial freedom.
You can then decide whether to still contract most of the year and draw just 37k to build up a big surplus in the company, or limit yourself to 6 months of contracting max and start having a life, a more enjoyable plan B etc.

For those who want to work less way before they reach pension age, I also give paying off the mortgage a higher priority than making wacking great pension contributions. Its no use dropping dead at 65 with the biggest pension fund in the world.

Very well put, GreenerGrass. With the exception of some contributions into my SIPP I'm lumping all spare cash into my offset mortgage too.

[ChimpMaster]

Belly - How long have you had your company open? If it's longer than a year (and preferably 2) then you might want to consider liquidating it. That way, you can get out all of the funds as a capital gain rather than income, and hence the amount is susceptible to CGT rather than PAYE.

If you do this post April '08 I believe it will work out more beneficial to you as the CGT rate will be fixed at 18%.

My accountant told me that he once wound down a company for a client who had 200k in it!

[GreenerGrass]

There is no right answer to this, it really depends on you. My current plan is to pay as much off the mortgage as possible while I am still happy contracting, as living mortgage or rent free IMHO is the first step to cutting back on working.

Agreed. If you have a large mortgage over a long term then restricting your income to 37 odd k to save tax seems to be cutting off your nose to spite your face.
With the exception of keeping a 1 year safety net for salary provision etc, I'll extract the maximum possible from my company until my mortgage is paid off, or at least insignificant.
At that point you will be a huge step closer to financial freedom.
You can then decide whether to still contract most of the year and draw just 37k to build up a big surplus in the company, or limit yourself to 6 months of contracting max and start having a life, a more enjoyable plan B etc.

For those who want to work less way before they reach pension age, I also give paying off the mortgage a higher priority than making wacking great pension contributions. Its no use dropping dead at 65 with the biggest pension fund in the world.

[d000hg]

Sorry for the slight tangent, but is it possible for my company to own the house I live in? It reminds me a little of the Red Dwarf book where in "Better than Life" Rimmer's body is owned by his company... but is it possible/beneficial? It possible it sees you could build up £200K in your company account and buy a nice house?!

[minstrel]

I think it depends on your strategy for getting the remaining cash out of the company.

Unless YourCo stops generating income and then you gradually take out the cash as dividends up to higher rate threshold over a number of years then you are probably going to get hit with some additional tax when you take the extra cash out.

If you accept you are going to get hit with additional tax at some point, then you may as well take it out sooner rather than later and pay off mortgage. Paying off mortgage capital will definitely be better than post tax investment income YourCo could make.

If you've got a strategy for getting the cash out without paying higher rate tax, you might be better keeping the money in the company.

If you do plan to take the cash out nowish then you are right it is best to wait until next tax year as you will have to pay the tax in Jan 2010 rather than 2009 (although payments on account will catch you up after the first year).

[beaker]

There is no right answer to this, it really depends on you. My current plan is to pay as much off the mortgage as possible while I am still happy contracting, as living mortgage or rent free IMHO is the first step to cutting back on working.

While paying money into your mortgage will not earn you any interest, you can always borrow against the increased equity in your home at a lower rate than most other kind of investment loans. You can then buy other income gererating investments while taking advantage of the tax deduction on the interest.

[bellymonster]

Thanks for the quick calculations, I have 23 years left on a 115k mortgage so it could save me a fair few quid.

I also thought it might be even better to take the lump sum out at the begining of the financial year which would mean not having to pay the tax until the January of the next tax year. Then switch to an offset mortgage and reap the benefit of the taxmans money.

[ASB]

[QUOTE=bellymonster;411310Obviously I will have to pay the upper tax band on it BUT will the interest saved on my mortgage out weigh the tax given to HMRC.[/QUOTE]

That rather depends on a number of factors. not least of which is your mortgage interest rate, balance on the mortgage and ther reamining term.

Take 10,000 net. Pay 2.5k in extra higher rate tax.

If you have a 150k mortgage with 20 years to go paying off 10k now, and maintaing the same payment rate will save you about 17k in interest and 2 years on the term. If you had a similar mortgage with say 5 years to go then it would save you about 3k in interest and a few months on the term.

There is a calculator here which allows putting in of one off extra payments.

http://new.egg.com/visitor/0,2388,3_...w_1028,00.html

And here:

http://www.freestylemortgages.com/2.5.html

However on the negative side you need to consider inflation and the fact that you will be losing interest on the 10k since you don't have it anymore. A lot of it comes down to your attitude on debt really.

[BrilloPad]

I've started to build up a nice wedge in the company accounts, over and above what I need for rainy days, but really don't want to extract any more as I'll be paying the high earnings tax on it.

It then occured to me that it might be better put to use for paying chunks off the mortgage. Obviously I will have to pay the upper tax band on it BUT will the interest saved on my mortgage out weigh the tax given to HMRC.

I've tried doing the math but came out with loads of different results.

Anyone else taken this approach?

I was going to but then I got divorced.

[bellymonster]

I've started to build up a nice wedge in the company accounts, over and above what I need for rainy days, but really don't want to extract any more as I'll be paying the high earnings tax on it.

It then occured to me that it might be better put to use for paying chunks off the mortgage. Obviously I will have to pay the upper tax band on it BUT will the interest saved on my mortgage out weigh the tax given to HMRC.

I've tried doing the math but came out with loads of different results.

Anyone else taken this approach?