Reply to: Saving for Tax

[diesel]

I think the problem is that many contractors don't see themselves as business owners. The company is simply a payment vehicle, and the money is all theirs so they can spend whatever they like. This leads to all sorts of problems long term as we know, but it's hard for some to get their heads around the concept of the company being a separate legal entity.

agree..where I am working out of approx. 20 contractors they cant understand when I have more than 1 client on the go how it works!

[Clare@InTouch]

And makes for good entertainment when they come to a free forum to seek help once they are in the doo doo.

You're just mean though

[northernladuk]

I think the problem is that many contractors don't see themselves as business owners. The company is simply a payment vehicle, and the money is all theirs so they can spend whatever they like. This leads to all sorts of problems long term as we know, but it's hard for some to get their heads around the concept of the company being a separate legal entity.

And makes for good entertainment when they come to a free forum to seek help once they are in the doo doo.

[Project Monkey]

I tend to advise people to open a business savings account at put aside the VAT plus 20% of their net invoice value there - that will cover all business taxes.

From a personal point of view do the same - after you've paid out dividends to the higher rate limit just put aside 25% of anything else into a savings account. The first year may be more difficult due to payments on account, but after that it should even out and you'll have it set aside for when you need it.

...oh, and don't spend it!


Alternately, I just put 10% of all dividends taken into a personal savings account and it usually works out about right. Anything left over after SA, I spend on sweets.

[Clare@InTouch]

Aside from the above suggestions on managing bank accounts, I can't really understand any business owner that wouldn't keep their own books (even if rough) and, essentially, be able to produce management accounts at any given time, in order to avoid problems such as paying dividends ultra vires, and operate conservatively. Having an accountant makes sense but, without your own books, you risk not being able to verify anything your accountant files for you, and you're responsible for those filings afterall.

I think the problem is that many contractors don't see themselves as business owners. The company is simply a payment vehicle, and the money is all theirs so they can spend whatever they like. This leads to all sorts of problems long term as we know, but it's hard for some to get their heads around the concept of the company being a separate legal entity.

[jamesbrown]

Aside from the above suggestions on managing bank accounts, I can't really understand any business owner that wouldn't keep their own books (even if rough) and, essentially, be able to produce management accounts at any given time, in order to avoid problems such as paying dividends ultra vires, and operate conservatively. Having an accountant makes sense but, without your own books, you risk not being able to verify anything your accountant files for you, and you're responsible for those filings afterall.

[TheCyclingProgrammer]

If you don’t expect to go into the higher rate threshold in the year after the bigger dividend then reduce the payments on account to nil.

Be careful when doing this because if you do reduce your payments on account by more than the following years tax liability then HMRC will charge you interest from the date that the payment on account was due.

Hope this helps!
Craig

Thanks. Seems reasonable enough. I do intend to actually extract a significant amount of retained profit from the company at the beginning of the next tax year so this was going to be an issue. I will be reverting to regular dividend payments (profit allowing) up to the threshold with no intention to go over it again for at least a few years while I rebuild up some of my war chest again.

[Craig at Nixon Williams]

If you were to take a lump sum from the company in one year, pushing you into the higher rate, but you normally don't go into the higher rate as you pay regular dividends up to the threshold, would it be reasonable to apply to have the payments on account reduced to nil in that situation?

If you don’t expect to go into the higher rate threshold in the year after the bigger dividend then reduce the payments on account to nil.

Be careful when doing this because if you do reduce your payments on account by more than the following years tax liability then HMRC will charge you interest from the date that the payment on account was due.

Hope this helps!
Craig

[kevpuk]

I have 3 accounts

1 Main Current
2 CT
3 VAT

For every invoice paid, the VAT is transferred in to the VAT account.

I use a variation on this:

1 - Current - Main account for everyday company running
2 - Business Savings - VAT (20% of all invoices paid goes in here)
3 - Business Savings - Vast majority of each invoice goes in here


Current a/c holds enough to pay Hector PAYE/NIC when due, accountancy/insurance, my paltry salary each month, expense/mileage reimbursement and so on. I leave it to float with little extra in...

VAT a/c earns small interest, being a savings account......as it gets 20% of all paid invoices, meaning when VAT is due there is always a little surplus because of FRS.....which generally just stays in the account, but sometimes is transferred to Current a/c for things like a one-off purchase - e.g. my shiny new Galaxy Note 3 t'other day

The third account, also a Savings account, gets the lions share of each paid invoice plonked in. This account will fund the Current when I draw a Dividend, or need to pay CT etc. It acts as company reserves, in general and earns me very little interest

[stek]

Sell the TVR...

[Maslins]

CT should be saved in the company account – if you only take dividends from profits available then (assuming all invoices have been paid correctly) there should always be enough funds in the company account for all taxes.

This (applies for VAT as well). Not much sympathy re these (especially as virtually all our clients are FreeAgent users which gives them nice easy access to the relevant numbers).

I do have a bit more sympathy re SA, as it can get confusing because you get a certain amount effectively tax free before you need to set aside 25%...then payments on account and/or student loan contributions can give people a nasty surprise.

[Jeremiah@RHJAccountants]

Claire & Craig have pretty much summed up what we advise to our clients.

Save any CT and VAT in company savings account.

Any dividends you take that put you into higher rate, save 25% of this in a personal savings account.

If you follow this process then you really should not be getting into a mess.

[TheCyclingProgrammer]

This doesn’t include payments on account, but that should work itself out if you take dividends fairly evenly throughout the year…

If you were to take a lump sum from the company in one year, pushing you into the higher rate, but you normally don't go into the higher rate as you pay regular dividends up to the threshold, would it be reasonable to apply to have the payments on account reduced to nil in that situation?

[TheCyclingProgrammer]

I keep everything in my business current account; the physical location of the money isn't important to me, as I spend according to what my accounts say. I use FreeAgent which means I always know how much retained profit I have in the company and what liabilities I have (same if you're using any other online system). Dividends should always come out of retained profit anyway, so you should have the corporation tax and VAT liabilities covered at all times unless you're taking out loans.

For personal taxation; I don't normally have a tax bill as I stay within the higher threshold but if I did have a tax bill to pay I would account for that when paying any dividends at the higher rate, and stick the tax in a savings account until it's needed. But likewise with my personal spending, I spend according to my personal budget (I use YNAB), not what's in my bank account(s).

[northernladuk]

How exactly do you get in a mess? You can't divi out the CT and VAT as it is not profit so would be an illegal dividend. You should be able to estimate your SA and save enough in your personal account to cover that. None of this is rocket science.

I have to wonder where your war chest is if you can't pay you SA and you don't have enough in your business account for CT and VAT?