Investing Reserves

[northernladuk]

You mention 20% tax, and in the next sentence dividend tax.
You need to sort your tax understanding out if you're intent on ignoring your accountant's advice.

You also need to have a clear view of your goals, and the options of how to get there. It's not guaranteed that you'll be able to continue contracting. You are a newbie after all. If you have to take a permie job how does that affect your route to those goals?
What if you do live longer than you think?
What will you want to leave your dependants? If you don't have any, do you forsee that you might get some?
Having the money invested by the company is probably the single biggest reduction in flexibility for all options. It works in some scenarios but not the majority.

And don't forget it's not just the 20% tax on profits. He'll be taxed when it comes to take it out, most likely at the 32% rate as you'll be emptying the account. ER is a factor but it's only on a small portion and it might not exist in the future.

[ContractNewbie18]

@northernladuk - understood re warchest. I mean talking specifics, I have 100k there right now. I'm only talking about say sticking 20k into a fund.

@lance - I worry/overthink every angle as it is - but pension is not going to be one of them. I'm 32, single, no kids, some health issues to a degree - making money when I'm 65 is not a current concern.

I've referenced 20% tax on an investment gain AND THEN the double taxation of dividends tax if I cashed in an investment. Is that not right?

Completely get the lack of flexibility - but if I wasn't planning on closing the company down any time soon, I see the difference between this and personally investing in a fund? i.e. if I stick 20k in now, realise I need it in 2-3 years and its at a loss/small gains - then I have to take the hit.

[ContractNewbie18]

Good point about being tied to keeping the company (and doing the accounts etc.) that I might not need due to the investment.

But that point still remains regardless.

Say you have 100k in reserves, your currently in contract adding to that (which yes may change) and you've maxxed out the lower dividend band - that 100k will sit there for years until you draw out under the lower rate between contracts.

I'm lucky enough to have maxxed ISA allocation - and could still do this into the next year or so from other means to do personally. As mentioned, no interest in putting anything further into a SIPP, so what would option 2 be?

Right now I think investing via the company - I hear you guys are saying your wedded to the company, being the con. I already have chunks of personal money invested - so I wouldn't want to pay 32% tax, the alternative is just leaving it sat there (which I've read above may have its own implications if I closed the company down? i.e. if I had 100k reserves and wanted to close the company tomorrow?). So why not invest the companies money vs accepting div tax vs. letting it sit in the business.

[ContractNewbie18]

I don't invest in anything that I'm not happy to hold for 5 years but I keep a large warchest. I view my investments with a far longer timeframe than I do my company. Just personal circumstance. I'd hate to find myself in a position where I no longer need my company but felt I had to continue to incur the costs and hassle of running it just because it is the shelter for my investments.

Personally, I'd be pulling enough to fully max out a SIPP and ISA before even looking at company-held investments.

Thanks - its more these 'CIC' that was seeking advice around. So to summarise:

There is a risk that you could be liable for 23% corp tax vs. 20% tax. Also that if you ceased work and wanted to close the company down you would have 3 years grace to wind up and cash in? Both of those seem reasonable vs. the alternative of letting reserves sit there or paying 34% tax pre any investment.

I'm guessing the CIC piece is all about ratios. I wouldn't be investing large proportions - but I am thinking that if I decide to do this, stick a proportion in soon as my business year end is the end of the month (have been in contract) whereas I may not be renewed in April.

[ContractNewbie18]

Personal situation wise - current thinking - I would rather invest the chunk I have in the company OVER the chunk of money I have doing nothing in a current account.

I guess I see either as medium term - with the understanding that I'm trying to grow the capital, but if its needed sooner, I risk taking a hit. I had the majority (aside from easy access bonds/premium bonds) sat doing nothing - as I don't know when I might need this. But I've added more personal savings into funds recently after I've monitored the markets over c. 2 years with small amounts.

My thinking is that the business reserves are doing nothing. If I needed money for emergency; I would go to personal savings doing nothing vs. business reserves doing nothing AND INCUR 32.5% tax. So why not invest the reserves with the chance of making an increase in the short-medium term?

Obviously I would keep a decent size warchest for say 12 months+ out of work.

[Lance]

making money when I'm 65 is not a current concern.

Why 65? Why not 55?
Why not 50 on savings and take pension at 55?

[Lance]

Personal situation wise - current thinking - I would rather invest the chunk I have in the company OVER the chunk of money I have doing nothing in a current account.

I guess I see either as medium term - with the understanding that I'm trying to grow the capital, but if its needed sooner, I risk taking a hit. I had the majority (aside from easy access bonds/premium bonds) sat doing nothing - as I don't know when I might need this. But I've added more personal savings into funds recently after I've monitored the markets over c. 2 years with small amounts.

My thinking is that the business reserves are doing nothing. If I needed money for emergency; I would go to personal savings doing nothing vs. business reserves doing nothing AND INCUR 32.5% tax. So why not invest the reserves with the chance of making an increase in the short-medium term?

Obviously I would keep a decent size warchest for say 12 months+ out of work.

you seem overly concerned about 32.5% tax.
That's an absolute bargain compared to what you'll be paying when you are forced inside IR35.

You can only avoid tax for so long. You are massively over-complicating a fairly simple thing here.
In your scenario you never retire, that's why you don't need a pension, you never take any money out as you don't want to pay tax.
You'll die with a hefty company bank balance.... Guess what. With no heirs that's 100% tax thank you very much for your input the UK debt.

[ContractNewbie18]

Purely because I don't need to withdraw the money out *currently*. As mentioned I've had a hefty sum of money sat on 0% over the last few years due to risk appetite.

I get the retirement/ age advice - buts thats just personal situation. I'm 32. Currently single with no heirs. I don't plan to be in that situation in 20 years, but as mentioned I don't think I'll get even to 50s.

My horizon is medium - advice above is all about trying to shift a focus to long term. Why would i take on extra stress worrying about money for 20 years that I may never see.

I'm basically looking to grow money in the medium (ish) term with the next likely scenario to be to withdraw as much as chosen for a house so that any mortgage would be as small as possible (would ideally keep my current flat and rent out).

The above posts are all about flexibility - investing in the SIPP is the LEAST flexible option going?

In any disaster situation you can withdraw money from personal/company investments and pay increased tax/take any charges hit on investments.

I don't tend to work with people with similar personal circs - hence the post - most ex colleagues are 40/50s - lumping into a SIPP or with debt that means there reserves are all minimal.

[northernladuk]

Just go for it then. We've said our bit.

[oilboil]

Purely because I don't need to withdraw the money out *currently*. As mentioned I've had a hefty sum of money sat on 0% over the last few years due to risk appetite.

I get the retirement/ age advice - buts thats just personal situation. I'm 32. Currently single with no heirs. I don't plan to be in that situation in 20 years, but as mentioned I don't think I'll get even to 50s.

My horizon is medium - advice above is all about trying to shift a focus to long term. Why would i take on extra stress worrying about money for 20 years that I may never see.

I'm basically looking to grow money in the medium (ish) term with the next likely scenario to be to withdraw as much as chosen for a house so that any mortgage would be as small as possible (would ideally keep my current flat and rent out).

The above posts are all about flexibility - investing in the SIPP is the LEAST flexible option going?

In any disaster situation you can withdraw money from personal/company investments and pay increased tax/take any charges hit on investments.

I don't tend to work with people with similar personal circs - hence the post - most ex colleagues are 40/50s - lumping into a SIPP or with debt that means there reserves are all minimal.

What I don't get is if you don't expect to be around in 18 years time and currently have a SIPP with lots in it and a maxxed ISA for the years you've been an adult and plenty of cash in personal accounts, 100K in profits and a healthy outlook on employment and your own flat - WHY THE HELL ARE YOU WONDERING WHAT TO DO WITH THE CASH??

Spend it on a great life, if your statements are true, you can fund your lifestyle adequately from earnings and don't need a pension (as if you "wander off" at 50 you can't touch it anyway). If its just you why bother getting a bigger place, enjoy the flat and blow the cash on frivilous stuff



I suspect though the reality is you do expect to live longer, you hope to have a family and you are looking for someone to come up with a Nirvana investment profile for you. Hint: If any of us really knew how best to invest our surpluses we wouldn't be on a contractor forum, we'd be on our superyacht instead