Reply to: newish contractor in the UK - advice on surplus cash in business bank account

[jeanaux]

providing you are eligible for entrepreneurs relief this allows you to take the remaining funds in the company when it closes at a rate of 10%. You and your wife could also be eligible for a capital gains free allowance of £10,900 but you may not be entitled to this depending on your residency status for tax purposes in the year of disposal.

Hi I just found this forum as I was looking for information that you touched on there. I'm in a similar situation to the original poster, but I've already started closing my company (I'm in the process of getting it struck off now) and I'm wondering whether I should try to get entrepreneurs relief for the last distribution of funds. I'm now a non-resident and have left the UK, and this will be my final tax return. So I was wondering what you know about that bit.

[Wanderer]

If you have a flexible mortgage then you may be able to take a director's loan and then pay it back later on but you need to get professional advice about this so speak to your accountant.

[dcx]

If you go down the route of leaving it in the bank account, you may wish to lock it away for a year in a business bond. Obviously you wouldn't be able to access it should you need to ( ie when benched).

A quick search gives several providers offering 2%. Unless I'm mistaken you will have to pay some tax on the interest, so it probably works out to be less than that (1.6% ?). But once u build up your warchest it actually is worth doing

Yep, i've had a look at the business bonds HSBC offers. I must say HSBC is pretty terrible with their rates, but i'm not sure if I could be bothered changing.

[dcx]

That bit is obvious and that is what you need to get out of and think smarter. For example.... You can divi to yourself as much of the net profit as you want when you want. If you have enough money in the account why not divi yourself up the tax break in the first month of the year and stick it in an offset mortgage or ISA or something and earn 4% rather than filtering it out slowly because you don't know any better and not getting any interest? You have to be pretty good a budgeting to not fall in to a hole in the year though but that is another issue. Your accountant can't make lifestyle choices for you and stuff. He can just tell you what he probably tells everyone else.

yeah, you are right. I'll be definitely looking at smarter ways to manage the cash coming into the company. I will be doing some long term planning over the next few weeks. Cheers!

[No2politics]

If you go down the route of leaving it in the bank account, you may wish to lock it away for a year in a business bond. Obviously you wouldn't be able to access it should you need to ( ie when benched).

A quick search gives several providers offering 2%. Unless I'm mistaken you will have to pay some tax on the interest, so it probably works out to be less than that (1.6% ?). But once u build up your warchest it actually is worth doing

[northernladuk]

believe me, i am am understanding it

but fair point, that's sort of the reason I posted the thread, to become more informed, and it is helping a great deal

To be honest, i just followed the basic instructions i received from the accountant, and it's been ok, but am now only questioning why after doing my first self assessment. I now realise there is the option of leaving it in the company and waiting for a lean year or to liquidate.

Yep, i will have to pay higher rate tax on 20K but i simply withdraw what I need to live, i have the personal tax set aside.

thanks for your input

That bit is obvious and that is what you need to get out of and think smarter. For example.... You can divi to yourself as much of the net profit as you want when you want. If you have enough money in the account why not divi yourself up the tax break in the first month of the year and stick it in an offset mortgage or ISA or something and earn 4% rather than filtering it out slowly because you don't know any better and not getting any interest? You have to be pretty good a budgeting to not fall in to a hole in the year though but that is another issue. Your accountant can't make lifestyle choices for you and stuff. He can just tell you what he probably tells everyone else.

[dcx]

I don't want to be rude but you seem to be missing a pretty fundamental understanding of how your business works. We are answering your questions and off you pop a happy man but you are not understanding it. You have a legal responsibility to understand how your business works and how it handles it's finances. You will also probably save yourself a lot of cash if you did. It sounds like you have paid higher rate tax on about 20k from what you say. Understanding how profit works, your directors responsibilities and your options to get the money out will not only answer the question you have but any other complexities in the future.

Relying on your accountant to say you can take £X out and not understanding why a is a bit bloody daft I am afraid. You control your company and it's money NOT your accountant.

believe me, i am am understanding it

but fair point, that's sort of the reason I posted the thread, to become more informed, and it is helping a great deal

To be honest, i just followed the basic instructions i received from the accountant, and it's been ok, but am now only questioning why after doing my first self assessment. I now realise there is the option of leaving it in the company and waiting for a lean year or to liquidate.

Yep, i will have to pay higher rate tax on 20K but i simply withdraw what I need to live, i have the personal tax set aside.

thanks for your input

[dcx]

If your company has retained profit to distribute, you can take a dividend as long as you or your accountant draws up the necessary paperwork.

A company's ability to declare a dividend is not dependant on it having active business; it just needs (net) profit.

If you can live on the proceeds of a basic salary + dividends up to the higher rate threshold, then my advice would be to take no more than that and leave the rest for when you need it. I'd be surprised if your mortgage interest saving would outweigh the additional tax due.

ok thanks i thought that was the case, but i've always just paid myself when I invoice my client

that's a good point about the mortgage, much better to keep it in the company accounts, cheers

[northernladuk]

thanks! that makes sense, i'll work it out

this brings me to another question, if i have a few months off for example - am i able to ask my accountant to organise a dividend payment for myself without any invoices? I guess as long as i stay under the higher tax threshold and have the surplus cash?

I don't want to be rude but you seem to be missing a pretty fundamental understanding of how your business works. We are answering your questions and off you pop a happy man but you are not understanding it. You have a legal responsibility to understand how your business works and how it handles it's finances. You will also probably save yourself a lot of cash if you did. It sounds like you have paid higher rate tax on about 20k from what you say. Understanding how profit works, your directors responsibilities and your options to get the money out will not only answer the question you have but any other complexities in the future.

Relying on your accountant to say you can take £X out and not understanding why a is a bit bloody daft I am afraid. You control your company and it's money NOT your accountant.

[TheCyclingProgrammer]

thanks! that makes sense, i'll work it out

this brings me to another question, if i have a few months off for example - am i able to ask my accountant to organise a dividend payment for myself without any invoices? I guess as long as i stay under the higher tax threshold and have the surplus cash?

If your company has retained profit to distribute, you can take a dividend as long as you or your accountant draws up the necessary paperwork.

A company's ability to declare a dividend is not dependant on it having active business; it just needs (net) profit.

If you can live on the proceeds of a basic salary + dividends up to the higher rate threshold, then my advice would be to take no more than that and leave the rest for when you need it. I'd be surprised if your mortgage interest saving would outweigh the additional tax due.

[dcx]

If you would only put it into your mortgage, then a simple calculation presents itself...would the savings in mortgage interest outweigh the increased tax cost if you took the money now (as opposed to later when you're out of work and could possibly take the money without paying extra tax)? Factor in the added security of keeping the money around. Then you have your answer.

And yes, of course you can keep paying yourself dividends when you're not on a contract (but only if the company has enough retained profit).

thanks! that makes sense, i'll work it out

this brings me to another question, if i have a few months off for example - am i able to ask my accountant to organise a dividend payment for myself without any invoices? I guess as long as i stay under the higher tax threshold and have the surplus cash?

[Clare@InTouch]

Looking at my documents from last year I paid myself about £690 / month. Which makes sense because I did my personal tax self assessment and have to pay about ~£5-6K (25% of 20K).

My foreign income is slightly negative as i have property overseas. (I assume I can't do anything with this in the UK however)

You can offset foreign losses in certain circumstances, but it's usually not worth it. Especially if you're going back home, just carry them forward to use there later.

[dcx]

It depends on what your other income is - what salary did you have, and do you have bank interest, foreign income, rental income, other salary, self employment etc?

In the current tax year you could take a salary of £641 per month and net dividends of £30,000 and, assuming no other income, pay no tax. Anything above £30,000 would lead to a tax liability of 25% of the excess.

Looking at my documents from last year I paid myself about £690 / month. Which makes sense because I did my personal tax self assessment and have to pay about ~£5-6K (25% of 20K).

My foreign income is slightly negative as i have property overseas. (I assume I can't do anything with this in the UK however)

[TheCyclingProgrammer]

it looks like leaving the cash in the company might be the easiest thing to do as I don't specifically need the money at the moment (I would just put it on my mortgage), but i will definitely research the other suggestions in this thread

If you would only put it into your mortgage, then a simple calculation presents itself...would the savings in mortgage interest outweigh the increased tax cost if you took the money now (as opposed to later when you're out of work and could possibly take the money without paying extra tax)? Factor in the added security of keeping the money around. Then you have your answer.

And yes, of course you can keep paying yourself dividends when you're not on a contract (but only if the company has enough retained profit).

[Clare@InTouch]

thanks for your reply, it's very helpful

about the 55K, that is my gross dividend minus 5K in tax credits gives me a dividend payable of 50K...i'm not really sure what the implications of this are, or what amount it should be, it's just what my account sent me. Any info on this would appreciated...

As for a warchest, it is a wise idea. But how would it work in practice? If I was out of work for 6 months can I just simply keep paying myself dividends?

It depends on what your other income is - what salary did you have, and do you have bank interest, foreign income, rental income, other salary, self employment etc?

In the current tax year you could take a salary of £641 per month and net dividends of £30,000 and, assuming no other income, pay no tax. Anything above £30,000 would lead to a tax liability of 25% of the excess.