Reply to: Living off my warchest

[TykeMerc]

Wanderer I believe the accepted wisest practice is to withdraw up to the tax threshold every year that the company has the funds (earned that year or retained profits) let's call it £45k.
If you draw less say £35k then the 10k difference is permanently lost as a tax efficient drawdown.
Using the company as a saving and investment vehicle for the extra (minus pension contributions if you like them) makes sense as retained profits can be drawn tax efficiently in later years. The effects of inflation should be mitigated to an extent by sensible investment.

[Wanderer]

My plan is to take a reasonable salary + dividends each year. Leave the rest in the company building up a decent pot.

My understanding is that it's best to take income right up to the higher rate tax limit. I plan to keep the rest in the company then figure out a tax efficient way to draw it at a later date (perhaps to cover unemployment, career break, illness, retirement, career change, setting up a new business etc).

My thinking is that it would be a really bad idea to use the company as a "savings account" by retaining a load of cash when I could draw it as dividends at lower rate tax because I might have a problem drawing the money in subsequent tax years without hitting the higher rate tax band.

Scenario A , say my company fees were (very roughly) £70k/year - £15k CT leaving £55k. I could draw £45k from my company without hitting higher rate tax and retain £10k/year. After 5 years I have £50k retained in the company that I have to figure out how to withdraw.

Secenario B, I lived on £25k a year and kept the other £35k in the company then I would have £175 retained after 5 years. Now I couldn't withdraw that money without incurring a higher rate tax charge - I would be better off in scenario A where I'd taken the money while I could.

The figures are very rough, but is that generally correct or am I missing something?

[MrRobin]

Sheesh... lets consider the 2 sides with some example figures, OK?

A) contractor79 says take all the money out now, take the tax hit, and put the money in ISAs to grow tax free.

B) Everyone else says keep the money in the ltd, invest it but pay the corp tax on profits from investments and then draw out income when (early) retirement comes along.

Say there is £100k in retained profit in your ltd. (A) Taking that out now would attract £25k in tax, so £75k left. Put £10k in an ISA straight away and top up £10k every year, the rest of it is in normal investment / savings accounts. Assuming average 5% return for each, after 10 years you'll end up with ~£108k which you can blow in one go or take out gradually or whatever.

(B) Keeping the cash in the ltd and investing in various things (again at an average of 5%) will mean after 10 years £142k after corp tax on the investment profits. You can then draw on this money up to £40k a year (under current tax rules) in divis with no additional tax to pay.

It's pretty clear that option (B) is by far the best way to go unless you think you'll need a huge pile of cash to buy something extravagant at retirement (in which case option (B) would attract the higher rate 50%, if it still exists at that time)

[ChimpMaster]

To the OP:

You're doing the right thing, thinking about this now and not abusing your income ("respect the contractor money" as Milan once said).

My plan is to take a reasonable salary + dividends each year. Leave the rest in the company building up a decent pot.

At a suitable time, i.e. when my contracting slows down or meets a natural break, close the company and apply ESC-16, if possible. Take funds and invest in income-generating assets (property, shares, agricultural land, whatever takes your fancy my friend).

Just to give you an idea, in today's economy, your £500k will give you a taxable annual income of approximately :-
£15,000 in a 3% rate bank account ... or
£30,000 if you invest in reasonable BTL properties (with associated hassle of course)


Depending on how long you build up that pot, yes inflation will certainly reduce the real value of your money. But what can you do? You can buy a BTL property in your company name, and rent it out, which is actually very little hassle. The income is taxable under your Ltd Co, but so what? This can work to your advantage if you're a higher rate tax payer. When (if) you sell the property, the profit is not subject to CGT allowance - which means it costs you about £2k in tax when (if) you sell the property... so what?

Are you married? Get your wife to open a Ltd and then loan her Ltd the money from your Ltd. Buy a BTL property (or other income-generating asset) in her company. Her company makes profit (for example rental), and pays your company interest on the loan, so your company makes profit. Look out for associated companies implications though.

I'm not an accountant or adviser either, but hopefully the info above will give you some insight and highlight how your question opens up a whole universe of possibilities and questions.

I wish it was as easy as work, save, invest, retire. But that'd make me a permie.

[NotAllThere]

Keep the discussion to the matter in hand, please

[contractor79]

I am fully aware that going over the 40% tax bracket doesn't attract full 40% tax, but after tax credits it's still high enough to make inflation less of a concern that it's more sensible to leave the excess cash in the business and withdraw it in a tax efficient manner or of course there's always pension plans if you believe in them and their providers. Investing via the business takes care of inflation concerns even with corp tax on profits.
I have an issue with many of your past posts and what I consider to be poor advice you've peddled, if you feel I've insulted you then feel free to report me to the admin/mod team.

You are not listening. Investment gains and income from investments via the business are taxed. Then you are taxed again when you pull it out. Just pull it out and put in ISA or put in pension. I don't agree that I've peddled poor advice what on earth are you referring to? Inflation is a major concern if you are looking to draw out income in the long term anyone who knows anything about finance knows that.

[TykeMerc]

No it's not good in the business as you're taxed on the investments made in your company.

You are not taxed 40% if you pay yourself in dividends from the company.

Stop throwing insults until you got your facts together. Are you still upset about my views on gays? Is that what this is about?

I am fully aware that going over the 40% tax bracket doesn't attract full 40% tax, but after tax credits it's still high enough to make inflation less of a concern that it's more sensible to leave the excess cash in the business and withdraw it in a tax efficient manner or of course there's always pension plans if you believe in them and their providers. Investing via the business takes care of inflation concerns even with corp tax on profits.
I have an issue with many of your past posts and what I consider to be poor advice you've peddled, if you feel I've insulted you then feel free to report me to the admin/mod team.

[contractor79]

Which is why the OP mentioned using investment vehicles within the business...

If you consider the money lost in additional personal taxation by going over the 40% tax bracket inflation is trivial in comparison, therefore the best place for the cash is in the business or (if you consider them worthwhile) a pension plan.

No it's not good in the business as you're taxed on the investments made in your company.

You are not taxed 40% if you pay yourself in dividends from the company.

<<Moderated - Stick to the subject under discussion.>>

[TykeMerc]

You don't get it. Maybe that's why you throw insults.

Inflation will eat up your war chest big time. You will need to invest your company money in something that needs to at least keep pace with inflation. I'm not just talking about the published inflation 2-3% that the politicians engineer but the real life inflation of 7-8% that normal people's bills go up by. At least in a pension you will achieve this kind of return. The poor rate of interest you get in a business savings account won't keep up with inflation.

Which is why the OP mentioned using investment vehicles within the business...

If you consider the money lost in additional personal taxation by going over the 40% tax bracket inflation is trivial in comparison, therefore the best place for the cash is in the business or (if you consider them worthwhile) a pension plan.

[contractor79]

It's quite simple, unless you're willing to pay a lot of additional personal tax to get it out and put in ISA's then the best thing to do with excess cash in the company is to leave it there to take later when benched, holidaying or retired or (if you have any faith in them) put a goodly sum into a pension plan.
Frankly based on you posting history in the Business and Accounting sections I'd question your thinking on any subject.

You don't get it. Maybe that's why you throw insults.

Inflation will eat up your war chest big time. You will need to invest your company money in something that needs to at least keep pace with inflation. I'm not just talking about the published inflation 2-3% that the politicians engineer but the real life inflation of 7-8% that normal people's bills go up by. At least in a pension you will achieve this kind of return. The poor rate of interest you get in a business savings account won't keep up with inflation.

So you either put your money in ISA's now in equities, you can put just above £10k/year in that now. And/or pay into a pension from your company. Keeping it in your company account to get measly interest is losing you money.

[TykeMerc]

Don't underestimate the force of inflation. £30k after 10 years may just be worth half what it is now. Having lived off a warchest for a while myself I was stunned at how the prices of things were going up just over a few months.

I would question whether it is wise to keep that much in your ltd co. Why not take it out now and invest elsewhere? Put in ISAs or put some in a pension. You can save tax now if you put into a pension but of course you can't draw out until you retire and then you will be income taxed on it.

Also is it really wise to keep that much in your Ltd company? What if you were sued - it wouldn't matter if you had next to nothing in your ltd co.

It's quite simple, unless you're willing to pay a lot of additional personal tax to get it out and put in ISA's then the best thing to do with excess cash in the company is to leave it there to take later when benched, holidaying or retired or (if you have any faith in them) put a goodly sum into a pension plan.
Frankly based on you posting history in the Business and Accounting sections I'd question your thinking on any subject.

[contractor79]

Ideally I would like those £500k to be invested somehow via the Ltd company (suggestions) to generate a bit of revenue - otherwise the £500k wouldn't last me for too long (taking £30k per year they would only last 17 years). I'm assuming mortgage paid off before retiring.

Don't underestimate the force of inflation. £30k after 10 years may just be worth half what it is now. Having lived off a warchest for a while myself I was stunned at how the prices of things were going up just over a few months.

I would question whether it is wise to keep that much in your ltd co. Why not take it out now and invest elsewhere? Put in ISAs or put some in a pension. You can save tax now if you put into a pension but of course you can't draw out until you retire and then you will be income taxed on it.

Also is it really wise to keep that much in your Ltd company? What if you were sued - it wouldn't matter if you had next to nothing in your ltd co.

[Wanderer]

Absolutely if it still exists, I made the assumption that by the time the OP had built up £500k that it would have been changed, abolished or made unavailable to small companies like the ones we have.

Yes, that would be one to do sooner rather than later. Might be an option worth considering but as you say - I wouldn't put it down as a long term plan.

[TykeMerc]

It might be worth considering applying for ESC-C16 as an efficient way to withdraw the money from your company?

Absolutely if it still exists, I made the assumption that by the time the OP had built up £500k that it would have been changed, abolished or made unavailable to small companies like the ones we have.

[Wanderer]

I've been contracting for a couple of years and the pot in my Ltd is starting to build up. I've been living cheaply and I intend to continue doing so, and I was wondering if it's acceptable/legal to at some point stop working but keep paying myself the minimum salary + dividends? Say if I manage to get £500k in my ltd company (after corp tax) can I pay myself a salary + divs off that pot for many years or would the HMRC have something to say about it?

It might be worth considering applying for ESC-C16 as an efficient way to withdraw the money from your company?