Reply to: How Do I Build A War Chest

[lithium147]

If you are married, your partner is not working, and you are not planning to get divorced in the near future, you can use income shifting:
Contractors' Questions: Can I 'income-split'? Income splitting :: Contractor UK

Also, dividends come with a 10% franking credit.
This takes a while to get your head around.
Its effect is only to reduce the total amount that you can extract from your company before hitting the 25% dividend tax.
for 2012/13
Upper limit: £42,475.00
less PAYE: £7,596.00 (you might pay yourself something else)
multiply by tax credit: 1-10%
( £42,475.00 - £7,596.00 ) * 0.9 = £31,391.10

[psychocandy]

Thank you all for the responses. I will use these first few months to reduce credit card debt and build up my Co balance sheet while keeping personal spending to a minimum.

Like I said need to balance this out a bit. If debts are at full credit card rate then crack on pay them off as soon as. If things go pear shaped, you can always just rack up the debt again if needs be.

In my case, debts were at low balance transfer rate so even though they were costing me it was not as much. So what I didn't want to happen was to chuck ALL my spare cash at them then something untoward happen with contract. Suddenly, no savings and all spending would now have to go back on at FULL interest rate.

[Ignis Fatuus]

Here's my back of the envelope calculations for what 10000 of company money becomes in your pocket under various options:

1. If you are on Basic Rate Tax (and normal Employee's NI).
As a dividend: 8000
As PAYE: 5976

2. On Higher Rate Tax (and above Employee's NI upper limit).
As a dividend: 6000
As PAYE: 5184

3. Worth noting for older contractors on HRT but expecting to retire on BRT is the option of the company paying it directly into a SIPP. If the contractor then takes out 25% tax free, and draws the rest while retired and paying only Basic Rate Tax:

total: 8500.
(tax free 25%: 2500; ultimate income, 7500 at 20% tax, no NI: 6000)

[northernladuk]

Thank you all for the responses. I will use these first few months to reduce credit card debt and build up my Co balance sheet while keeping personal spending to a minimum.

A war chest should last up to 6 months or even more. It is going to take more than a few months to build it up to a suitable level and IMO credit cards are a personal finance issue which I keep separate from my company finances. If you mix the two you will find you will end up using the company money (i.e. warchest) money to prop up your personal life.

[Oscar10]

Thank you all for the responses. I will use these first few months to reduce credit card debt and build up my Co balance sheet while keeping personal spending to a minimum.

[doomage]

Treasure chest, Storage chest? The OP wants a War Chest.

Just don't spend too much, I always plan to have enough to live for 1-2 years without a cut in quality of life.

If you move from Perm to Contract and can't save then there is something VERY wrong with your financial management.

GL.

Or a sick child. Many things can happen.

[Scrag Meister]

Treasure chest, Storage chest? The OP wants a War Chest.

Just don't spend too much, I always plan to have enough to live for 1-2 years without a cut in quality of life.

If you move from Perm to Contract and can't save then there is something VERY wrong with your financial management.

GL.

[jamesbrown]

That is true in the scenario above. But it is always good to remember that the company tax bill is completely separate from a personal tax bill.

Indeed -and I appreciate that you know all this better than I - I just thought it worth clarifying, as others might infer that the 25% was the overall tax due on the high-rate dividend, when it is the additional, personal, tax due. Of course, comparing permie and contractor tax is a somewhat artificial comparison to begin with but, given that, I think total tax matters.

[Nathan SJD Accountancy]

The additional tax due will be 25% insofar as dividends come from profits that are subject to CT. For example, as a higher rate tax payer, you'd ultimately lose 4k on an original company income of 10k when taking a net dividend of 8k, i.e. (0.2*10k)+(0.25*8k).

That is true in the scenario above. But it is always good to remember that the company tax bill is completely separate from a personal tax bill. However, I do understand where you are coming from.

[Nathan SJD Accountancy]

Yes, but in effect, if you're dividend takes you over the 40% bracket you wil pay a shedload more tax on it than if it was below.

Yeah definitely. I just added the minor detail in case the OP thought dividends in the higher tax bracket would be at 40%.

[ChimpMaster]

In many ways I actually found it easier to save when I went contracting, due to:

1) Earning more 'hard' cash rather than receiving permie employee benefits like holidays/pension/sick pay etc.
2) Having a Ltd Co in which funds would accumulate, and not having those funds immediately accessible to me.

I was always OK at saving but the 2 points above really saw me take a leap and not only save but build a decent warchest and, beyond that, an investment vehicle.

I should also add that although my company's income was reasonably high (compared to perm salaries anyway), I did not increase my expenditure until I was comfortable, 3 or 4 years into contracting. In fact, initially I reduced my personal/family expenses because moving to contracting should be viewed as a risk, a business venture that may or may not have longevity.

In fact, I'm sure many would agree that you should ideally have a warchest before entering the contracting world.

[psychocandy]

I've only been contracting a few years, but if I had any advice to give for a new contractor it would be to get disciplined about the warchest as soon as possible.

The mechanics of how you do it (divis / isa / company savings) aren't that relevant. What is important is setting your target and doing whatever you can to get there as soon as possible. So set an amount to put aside each month and make that non negotiable. If you have to set up a standing order to another account then do it. Setting a target will also focus your efforts, it makes it easier to say no to unnecessary spending (I'm looking at you, array of unused gadgets )

This also means don't splash your income on suspect 'expenses' (laptops, fancy phones etc) until you have achieved your warchest target level. Forgo holidays if you can, these are doubly expensive.

The target is up to you, but a warchest is more than just to pay out when you are benched. It is also peace of mind, and for your business it means being able to choose suitable contracts, hopefully the good ones that lead to better ones with higher rates or more interesting work.

Yep. Agree.

One other thing. If you go into contractng with debts you need to balance whats best i.e pay off debts first or save.

Personally, I go for a mixture of both. Depends how much you're debts are costing you - if its low interest balance transfer there is an argument for leaving them there and keeping money in savings. Might cost you more but when debts are paid, then you suddenly have no income, and no savings, you might then have to use full rate credit cards instead.

[psychocandy]

Just to add and clear up any confusion. If the income you receive as dividends is in the higher tax bracket, the tax due will be 25%, not 40%. The 40% tax in the high tax bracket applies where the income in that higher tax bracket is employment (e.g. salary) or savings income (e.g. bank interest).

A dividend is investment income which has a lower tax rate compared to employment and savings income.

Yes, but in effect, if you're dividend takes you over the 40% bracket you wil pay a shedload more tax on it than if it was below.

[northernladuk]

Northern Lad,

You are simply cruel. Ok, ok.... with a little humour. Did you use to be a comic?

I thought I was just giving a measured response inkeeping with the quality of the question asked by the OP..

[muser]

Here you go...

Northern Lad,

You are simply cruel. Ok, ok.... with a little humour. Did you use to be a comic?