Reply to: WARCHEST- best way to build it up

[Support Monkey]

True enough I guess. As company director its up to you how company profits are allocated.

Wonder how much you'd get in tax credit? Doubt it would be much if your partner is working though - When I was recently on the dole I asked them how much extra I could get (my mrs works part-time £15K a year) and I ended up with an extra £40 a month. Along with the £65 per week JSA it aint much at all.

Thats right if your wife works, any income will be taken into account, my wife is not an employee so as no earnings as i said the amount you get will depend on what money you have coming in which in my case is only my paye and dividends and clearly you need to pay enough to live so this will dictate how much tax credit you can get again in theory if you could live on the basic and pay no dividends then you could get the full amount but would you want to live like that to make a few quid out of the goverment

just to answer wanders question, i have never heard you had to pay to the tax limit i have only ever paid the minimum wage and enough divis to live and its never ben questioned

[lje]

I'll only "suddenly" going to need the cash when I'm looking at buying a new house...which is coming. But not exactly a sudden thing.

Pensions....bluh... I'm 28 and don't trust that by the time I can get the money back (currently 55?) that there will be anything left. Plus I'm hoping to retire before 55. Am I being stupid on this?

A higher rate Business account + the possible Entrepreneurs' Relief could be interesting. Will have to speak to my accountants!

I'm just thinking that taking it out and having it in a higher interest account or an investment will be better than keeping it in. I've got to take it out eventually.

If you know you are going to want to use the money for a house then it may be worth taking out just enough this year at the 40% income tax rate to allow you to keep it within 40% next year rather than 50%.

I put money into a pension as well as having a cash ISA / stocks and shares ISA / tax free savings certificates. For me its about having a mixture of things so that I can choose when I want to retire. By the way, if you have a mortgage at the moment then I would definitely consider putting the money there, as long as there isn't a big penalty for doing so. I paid off my mortgage before building up the others to any great degree.

I'm 42 so maybe I'm more pension oriented?! But I started paying into mine at the age of 23. As long as I keep control of it (eg through a SIPP) then I'm happy. You can take 25% out cash free when you reach 55 too. You can always retire earlier using other nest eggs and draw your pension at 55. Not having to pay corporation tax on the money is a big draw for me. But I would only consider putting money in which is left over after I have paid myself up to the 40% limit.

[Olly]

Yes, taking out a Loan to help with something like buying a house is a great idea....Take £20k if you can afford to. Its a cheap source of finance for you...
(1) You need to pay interest on the loan if it exceeds £5k (currently 4% is the HMRC approved rate). However this is interest you are effectively paying back to yourself (through your own company), so the total net cost is the interest rate x the corp tax rate. In this case 4% x 20% = 0.8%. So a very cheap source of finance.

Did you just pick £20K as an example or is there some limit at that point?

Your point about the interest is interesting . I was lining up for a fee free variable rate offset mortgage at 2.89% (which it appears has just annoyingly risen to 3.09%)

My company money is getting 2.25% interest at the mo - so 1.8% after C.T.
If I were doing the sums I'd be including that in the cost of a loan from my company. So 1.8% + 0.8% = 2.6%

Of course this is all not withstanding how you're going to get the money out of your Ltd again. That might be taxed at 10% for example - or perhaps more or not all depending on what you do.

[Wanderer]

I am only in my second year of contracting so I am still way off where I want to be in terms of warchest. I am saving for a house on my own personal side (up to 40% max allowance) and the rest is staying in the business for the bad times (which I hope will never come). I doubt I will ever have trouble in taking money out as my wife has a lot of allowance. So for me the main task is getting up to the stage where a lot of you seem to be. I am not yet 28 so let's hope this upward slope continues.

I may take out a directors loan of 5k next year to help me with my deposit. So perhaps taking a loan out is one way of making use of your money in the short term?

If your wife doesn't earn then you should consider paying her a salary of £7,000 and making her a shareholder so you can split the dividends between you. If you are going to hit the higher rate tax then retain the money in the company. Don't retain money in the company if you can take it out in the current tax year and not pay higher rate tax on it because next year you might get boomed and your wife may be earning so you will lose the ability to take this money without paying higher rate tax.

When you take out a mortgage, make sure it's a fully flexible one not one of these namby pamby ones with a pile of complicated restrictions. Honestly, getting one of these was the best financial decision I've ever made - it's covered up for some serious ups and downs in my career.

[psychocandy]

Yes, taking out a Loan to help with something like buying a house is a great idea. If your company has the cashflow, there is no need to stop at £5k. Take £20k if you can afford to. Its a cheap source of finance for you if you are lucky enough to be in the position to do it. Two things to be aware of are;
(1) You need to pay interest on the loan if it exceeds £5k (currently 4% is the HMRC approved rate). However this is interest you are effectively paying back to yourself (through your own company), so the total net cost is the interest rate x the corp tax rate. In this case 4% x 20% = 0.8%. So a very cheap source of finance;
(2) If your loan is outstanding more than 9 months after the year you take it, your company will pay 25% of the outstanding loan balance as a form of temporary tax through the Corp Tax regime. This is where the good cashflow comes in. If you can afford to take this hit, then great. The 25% tax charge is repaid to you once the loan is repaid (or written off to a dividend or capital gain payment if/when you close the business down).

Worth giving some thought to anyway.

thanks for the explanation of directors loans. Must admit I didnt totally understand.

My accountant has advised me not to do it because of tax implications. Think he means if you forget to pay it back after year end +9 months. If you're this disorganised then thats your fault I guess......

[psychocandy]

I thought you should always take dividends right up to your higher rate tax limit otherwise you lose that allowance?

Lose it? You dont mean like a company budget where if you dont spend it one year you get less the next? LOL

If you dont go right up to the limit, potentially you are not being very tax efficient. But, of course, you might not even earn that much.

[psychocandy]

Dividend income counts, enter this as "other" income on the form, i take paye as minimum wage and then keep the dividends down but enough to live on for us.

it depends on what you need to survive in theory you could just pay the minimum wage and no dividend and rinse the system for all its worth.

True enough I guess. As company director its up to you how company profits are allocated.

Wonder how much you'd get in tax credit? Doubt it would be much if your partner is working though - When I was recently on the dole I asked them how much extra I could get (my mrs works part-time £15K a year) and I ended up with an extra £40 a month. Along with the £65 per week JSA it aint much at all.

[Greg@CapitalCity]

I am only in my second year of contracting so I am still way off where I want to be in terms of warchest. I am saving for a house on my own personal side (up to 40% max allowance) and the rest is staying in the business for the bad times (which I hope will never come). I doubt I will ever have trouble in taking money out as my wife has a lot of allowance. So for me the main task is getting up to the stage where a lot of you seem to be. I am not yet 28 so let's hope this upward slope continues.

I may take out a directors loan of 5k next year to help me with my deposit. So perhaps taking a loan out is one way of making use of your money in the short term?

Yes, taking out a Loan to help with something like buying a house is a great idea. If your company has the cashflow, there is no need to stop at £5k. Take £20k if you can afford to. Its a cheap source of finance for you if you are lucky enough to be in the position to do it. Two things to be aware of are;
(1) You need to pay interest on the loan if it exceeds £5k (currently 4% is the HMRC approved rate). However this is interest you are effectively paying back to yourself (through your own company), so the total net cost is the interest rate x the corp tax rate. In this case 4% x 20% = 0.8%. So a very cheap source of finance;
(2) If your loan is outstanding more than 9 months after the year you take it, your company will pay 25% of the outstanding loan balance as a form of temporary tax through the Corp Tax regime. This is where the good cashflow comes in. If you can afford to take this hit, then great. The 25% tax charge is repaid to you once the loan is repaid (or written off to a dividend or capital gain payment if/when you close the business down).

Worth giving some thought to anyway.

[Wanderer]

Dividend income counts, enter this as "other" income on the form, i take paye as minimum wage and then keep the dividends down but enough to live on for us.
it depends on what you need to survive in theory you could just pay the minimum wage and no dividend and rinse the system for all its worth.

I thought you should always take dividends right up to your higher rate tax limit otherwise you lose that allowance?

[Support Monkey]

Talking of tax credit - I'm assuming dividend income counts as income for this? Surely. Last year in permie role I got the minimum amount but I'd given up any hope for this year. Although, its on my list to phone them but how do I give them an estimate of my income?

SM - Are you telling me that your just taking a small salary or something and zero dividends so you can get tax credit?

Dividend income counts, enter this as "other" income on the form, i take paye as minimum wage and then keep the dividends down but enough to live on for us.

it depends on what you need to survive in theory you could just pay the minimum wage and no dividend and rinse the system for all its worth.

[NorthWestPerm2Contr]

I am only in my second year of contracting so I am still way off where I want to be in terms of warchest. I am saving for a house on my own personal side (up to 40% max allowance) and the rest is staying in the business for the bad times (which I hope will never come). I doubt I will ever have trouble in taking money out as my wife has a lot of allowance. So for me the main task is getting up to the stage where a lot of you seem to be. I am not yet 28 so let's hope this upward slope continues.

I may take out a directors loan of 5k next year to help me with my deposit. So perhaps taking a loan out is one way of making use of your money in the short term?

[northernladuk]

Pensions....bluh... I'm 28 and don't trust that by the time I can get the money back (currently 55?) that there will be anything left. Plus I'm hoping to retire before 55. Am I being stupid on this?

A higher rate Business account + the possible Entrepreneurs' Relief could be interesting. Will have to speak to my accountants!

Pensions are a moot point with some people thinking they are good some thinking they aren't. My take is that they are part of a portfolio so I don't have all my eggs in one basket. Putting money in to your pension reduces your Corp Tax so you save 20% on all the money you put in so another good way to get cash out of your company even if it does seem a long way off. Personally I would suggest you look in to it now while you can afford it. You can always freeze it when you settle down and have a family etc. Problem with pensions is too many people have put it off for too long which is one of the problems they are in a mess. It's for your future so up to you if you don't want to be comfortable in your old age and just spend it now. You can't escape the fact you are going to get old ... or die on the way. Either way a pension will help you or your nearest and dearest.

Have a read up on Entrepreneurs' Relief first. There are strings tied to it and you can't be doing it regularly. There is a possibility it won't be around for long either. There are plenty of threads on it. If you don't have that much spare in the account it shouldn't be too hard to get it out in the most effective manner.

[psychocandy]

I leave it all in the business account so i can claim the max family tax credit

Talking of tax credit - I'm assuming dividend income counts as income for this? Surely. Last year in permie role I got the minimum amount but I'd given up any hope for this year. Although, its on my list to phone them but how do I give them an estimate of my income?

SM - Are you telling me that your just taking a small salary or something and zero dividends so you can get tax credit?

[Support Monkey]

I leave it all in the business account so i can claim the max family tax credit

[Mehmeh]

I'll only "suddenly" going to need the cash when I'm looking at buying a new house...which is coming. But not exactly a sudden thing.

Pensions....bluh... I'm 28 and don't trust that by the time I can get the money back (currently 55?) that there will be anything left. Plus I'm hoping to retire before 55. Am I being stupid on this?

A higher rate Business account + the possible Entrepreneurs' Relief could be interesting. Will have to speak to my accountants!

I'm just thinking that taking it out and having it in a higher interest account or an investment will be better than keeping it in. I've got to take it out eventually.

You have already paid around 20% corporation tax on the profit so the additional 22.5% is on top of that (roughly - the 10%tax credit changes things slightly). It may be worth paying if you'd like to take the money out and use it for other things.

How likely are you to suddenly need access to all of the money? If not likely then the 50% tax bracket shouldn't be an issue.

Have you thought about paying a chunk of the money into a pension? Then you could get back the Corp Tax you paid on it.

At the very least if you are keeping it in the company then I hope you have found a high earning business savings account (well - as high as you can get anyway...).

If you close your company at any point you might be able to take it all out at 10% with entrepreneur's relief - but only if you don't start up another similar company straight away.