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Reply to: Lump sum

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Previously on "Lump sum"

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  • WordIsBond
    replied
    Originally posted by siouxchief View Post
    Thanks all I get what you are saying in regards taking the 7.5% rather than the 10% later. Must have had a brain melt yesterday not getting it. Seeing the numbers makes sense now.
    Good luck with it all.

    Leave a comment:


  • WordIsBond
    replied
    Originally posted by oliverson View Post
    I've never heard this word before but it's gotten my interest. My wife is company secretary and pretty much does nothing in the business, aside from offer occasional legal advice, for which she is qualified to do. I've been thinking about paying her the same £ 8.5k salary as me but felt uneasy about it given she doesn't do much. However, this 'stipend' may just be a justifiable route to doing that. On the same subject, I'll be taking a company car from April 2020 when the BIK is 0% on electric vehicles. I'm wondering if I could do the same for the wife as well?

    Thanks in advance and apologies for hijacking this thread (kind of) :-D
    1. There's a business reason for having an officer other than yourself. If you fall ill, die, or smash your new EV, someone needs to run the company. So it is legit to have your wife as secretary or director.
    2. The role comes with legal responsibilities and liabilities, so it is appropriate to pay her a stipend/salary/call it what you want. If you make it too large HMRC could potentially challenge it as being not for business purposes. No one here has ever suggested that they've heard of HMRC challenging £8.5K. It is pretty standard practice, and it would be hard for them to challenge it for not much benefit. In all probability you are very safe to do this.
    3. It might be a lot harder to justify giving your wife a company car. Yes, she's 'working' as a director, but salary and a company car? That might begin to move into the territory where HMRC just might say, 'That's excessive, what's she actually doing in the company.' I personally would not do that and my wife does bookkeeping / payroll (and we have multiple employees) / bill-paying as well as being a company director.

    Some time back when I was looking for an accountant, one chartered accountant suggested I do exactly that -- company car for my wife. He's the same guy who told me I could buy a dog, dog food, etc, through the company because it is a 'security device'. He also said he had a farmer client who installed a swimming pool as a sheep dip pool. I did not ask about these things, he volunteered them as ways he could help me save tax. The accountant I chose advised against the dog, the pool, and the company car for Mrs. I say this to say that there are risk-averse people who wouldn't do this and there are at least some risk-friendly people, including accountants, who would. Ask your accountant and choose your own risk profile.

    Leave a comment:


  • siouxchief
    replied
    Thanks all I get what you are saying in regards taking the 7.5% rather than the 10% later. Must have had a brain melt yesterday not getting it. Seeing the numbers makes sense now.

    Leave a comment:


  • oliverson
    replied
    With regard to paying your wife, there are plenty of arguments on here that just the responsibility of being a director is worth the payment alone without doing any work. To be fair the fact you've done some diligence and made a decision based on it puts you way head of the raft of couples where the wife probably doesn't even know she's a director so wouldn't worry about it too much.[/QUOTE]

    Thanks for the link. Quite an old article but assume it's still valid.

    So, if it is treat as a BIK but there is 0% BIK on electric cars for 2020-21 then it's two Teslas isn't it? Either that or a couple of iPace's

    Lower the corp tax, claim back a portion of the VAT. Win win. Let's just hope they raise the higher rate threshold to £80k, abolish IR35 and it's showtime.

    :-D
    Last edited by Contractor UK; 14 December 2019, 20:40.

    Leave a comment:


  • WTFH
    replied
    Originally posted by siouxchief View Post
    I need 1 more contractor rate to get a good mortgage...
    OK, I know we’ve kinda skipped over this, but you get a better mortgage by having a bigger deposit.
    Right now you’ve got a large lump sum, let’s call it “a deposit”.
    If you start using up your large lump sum, then you will have a smaller deposit.

    My advice - stick the lump sum into premium bonds, ISAs, and high interest savings.
    Then when you need the deposit for your house, you still have it.
    Do not put it into pensions, or anything where you can’t access it.

    Continue to pay salary & dividend out of your company, again when it comes to the mortgage it will show a consistent and steady income, which is all good for your personal financial profile.

    Years ago you got the most options and best rates on mortgages if you were only borrowing 60% - i.e. you put down a 40% deposit. The smaller the deposit, the fewer options and the worse rates.

    Leave a comment:


  • northernladuk
    replied
    With regard to paying your wife, there are plenty of arguments on here that just the responsibility of being a director is worth the payment alone without doing any work. To be fair the fact you've done some diligence and made a decision based on it puts you way head of the raft of couples where the wife probably doesn't even know she's a director so wouldn't worry about it too much.
    Last edited by Contractor UK; 14 December 2019, 20:40.

    Leave a comment:


  • oliverson
    replied
    Originally posted by WordIsBond View Post
    Largely, I agree with Lance.

    Let's put some specific numbers to the test, OK? Let's say, just for example, you pay yourself £8500 a year in salary (so no National Insurance) and pay Mrs the same for a Director's stipend...


    .
    I've never heard this word before but it's gotten my interest. My wife is company secretary and pretty much does nothing in the business, aside from offer occasional legal advice, for which she is qualified to do. I've been thinking about paying her the same £ 8.5k salary as me but felt uneasy about it given she doesn't do much. However, this 'stipend' may just be a justifiable route to doing that. On the same subject, I'll be taking a company car from April 2020 when the BIK is 0% on electric vehicles. I'm wondering if I could do the same for the wife as well?

    Thanks in advance and apologies for hijacking this thread (kind of) :-D

    Leave a comment:


  • BR14
    replied
    Originally posted by siouxchief View Post
    in a year or 2 which (was our plan anyway) take entrepreneurs relief and go perm.
    so how do you know you can just 'go perm' 2 years from now?

    buy lottery tickets.

    Leave a comment:


  • WordIsBond
    replied
    Originally posted by siouxchief View Post
    @WordIsBond what if we decide to take no dividends over 2K so the tax isn't 7.5% now versus 10% later decision?

    So every year take salary, 2k dividend allowance and pay CT etc as normal then needed extra completely live off the few 100k we got from a house till we close the company and take one hit if 10%? Leaving aside that MVL rate could increase for now. Thanks
    Largely, I agree with Lance.

    Let's put some specific numbers to the test, OK? Let's say, just for example, you pay yourself £8500 a year in salary (so no National Insurance) and pay Mrs the same for a Director's stipend, and that leaves you exactly £150K in profit each year for the next two years, £300K total. (I rounded the salary for simplicity, it should be £8632 or something.)

    You are going to pay £57K in CT, so your after tax profit available for dividend is £243K (£121.5K / year). Under both scenarios, you take an additional £4K / year in dividends each up to the personal allowance, and an additional £2K / year each for the dividend allowance. So you now have taken a total of £12K / year between you, and have no tax. You have taken £29K in salary and dividend, tax free. That leaves the company with a total reserve of £109.5K per year, £219K after two years.

    Under your scenario, you take nothing more. After two years, you go the ER route, exempt £24K (CG allowance) and pay 10% tax on £195K, or £19.5K in tax, paid in two years time, leaving you an after tax ER proceeds of £199.5K. Total, you've taken home (together) £228.5K, with personal tax of £19.5K.

    Alternatively, you could take an additional £35.5K dividends each per year (£71K total). You would pay (together) £5325 per year in dividend tax. At the end of two years, you would have paid £10,625 in dividend tax, out of the £142K from the two years, so a net £131,375 after tax. You would then have £77K left in the company. You do an MVL and claim ER. You get a £24K CG allowance, so you pay 10% tax on £53K, or £5.3K. Thus, your MVL clears £71.7K. Net, you've cleared take home of £232K and paid right at £16K in tax.

    Your plan clears £228.5K and costs £19.5K in tax using ER.

    The second plan, which takes dividends up to the higher rate threshold, clears £232 and costs £16K in tax.

    Obviously, if the numbers are different the savings is different, but the savings are only going to go one way unless the reserve in the company drops below £24K at the point of closing the company. It would be dumb to pay dividend tax to take dividends that drop you lower than that.

    If you can't take this example and plug in your own numbers, get your accountant to work it out for you. But it only makes sense to take the dividends, especially since there is a risk of ER going away or being changed. Get the money out cheaply while you can. But don't go into higher rate territory unless you have to, that would be stupid.

    Leave a comment:


  • Lance
    replied
    Originally posted by siouxchief View Post
    @WordIsBond what if we decide to take no dividends over 2K so the tax isn't 7.5% now versus 10% later decision?

    So every year take salary, 2k dividend allowance and pay CT etc as normal then needed extra completely live off the few 100k we got from a house till we close the company and take one hit if 10%? Leaving aside that MVL rate could increase for now. Thanks
    why would you do this?
    Turn down 7.5% tax in favour of 10% tax??????
    The 10% tax rate that might be gone come April 2020 (think Korbyn).

    Always take dividends to the top of the 7.5% rate. To not do so is pretty dumb (unless you're putting it all into pension).

    Don't forget than an MVL is not a free closure of the company either. Depending on the sums involved, and the contracting rate, it might be best just to take it all as divis but over a longer period.

    This all sounds wrong. And if you have a decent pot of cash why burn it on day to day living? Maybe that would be handy for a rainy day.

    I'm afraid I just don't get the logic here. Maybe I'm a bit thick but it makes no sense.

    Leave a comment:


  • siouxchief
    replied
    @WordIsBond what if we decide to take no dividends over 2K so the tax isn't 7.5% now versus 10% later decision?

    So every year take salary, 2k dividend allowance and pay CT etc as normal then needed extra completely live off the few 100k we got from a house till we close the company and take one hit if 10%? Leaving aside that MVL rate could increase for now. Thanks

    Leave a comment:


  • siouxchief
    replied
    Thank you very much and every one of your assumptions was correct in your analysis. Exactly the detail I wanted, will discuss these details with the Mrs now.

    Thanks again

    Leave a comment:


  • WordIsBond
    replied
    I think you are missing something.

    First, I'm assuming you are still taking salary up to the NI threshold, without incurring any tax. If not, you definitely are missing something, because those funds will be subject to Corporation Tax if you don't. So definitely do that, but I'm guessing you probably knew that.

    I'm also assuming you were planning on paying CT on all profits (since you have to), and taking dividends up to your personal allowance, plus £2K dividend allowance. No income tax on that, so you need to do that. So we're talking about whether to pay yourself dividends beyond the dividend allowance, or to leave it in the company for ER.

    To be clear, you have to pay CT on profits either way, whether you leave it in the company until MVL and take ER or pay dividends now. Either way, Corporation Tax will be paid.

    So you are comparing whether you are going to leave all the profits (after dividend allowance) in the company, and pay tax at 10% (using ER) at MVL, or take dividends now, and pay tax at 7.5%. It seems likely you should take dividends up to the higher rate threshold (but definitely not over that) and pay the 7.5% now, rather than pay 10% later. The only thing that could change the dynamic is if we aren't talking very much money, and so most of it will fit in your capital gains allowance, but I'm guessing that's not the case. It would make sense to leave £24K or so in the company (assuming you are equal shareholders) to take advantage of the capital gains allowance, but anything over that amount, it would be more tax efficient to take as dividends in the basic rate band, if you can.

    There is an advantage to waiting, if you are going to invest wisely, in deferring the tax, and the difference between 7.5% and 10% is not large. But there's always the risk that the rules on MVL / ER change between now and then. If that happens, and you didn't take the dividends and pay 7.5%, you might end up having the privilege of paying 20%, or more, if you can't use ER anymore. I wouldn't take that risk, personally. I'd take the dividends (up to the basic rate band).

    The other alternative is to sink a lot of it into a pension. You can have your company do that and so not have to pay the CT, either. Maybe you've already considered that and rejected it. If not, you might want to think about that -- pension contributions are legit company expenses, so if you don't mind tying up the money until you want to retire, that's the most tax efficient way of all, in almost every case.

    The above assumes you and your wife each own 50%, have no other substantive income, that she is an officer and eligible for ER, and that your pension isn't near maxing out. If any of those assumptions aren't true some or all of the above might not be valid.

    Leave a comment:


  • Lance
    replied
    Originally posted by siouxchief View Post
    It's more a tax question than life decision one tbh.
    without knowing the exact numbers it seems a good starting point.

    Leave a comment:


  • siouxchief
    replied
    I need 1 more contractor rate to get a good mortgage but in general I'm tired of contracting so will go perm soon after. It's more a tax question than life decision one tbh.
    Last edited by siouxchief; 20 August 2019, 16:43.

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