WARCHEST- best way to build it up

**SimonMac** · 13 July 2011, 07:29

If Income > Expenditure THEN Warchest = Big

On a serious note you won't pay CT tax twice on the same profit, however if its in the company during the lean time you can withdraw it as salary rather than DIV's which can then be used to reduce the next years CT bill

**Pondlife** · 13 July 2011, 07:40

Originally posted by contractor55 View Post

Doesn`t "kept" money already have CT paid against it?

Yes it does.

But to answer your real question - is it better to retain the warchest funds in the company or take as divs now and stash in personal savings acct.

This is where people have different opinions. Some take the view that it's better to keep it in the company and either continue to pay salary/divs, pension contributions etc whilst benched . Or if leaving contracting for a while, closing the company and getting the cash out at a lower tax rate (search on here for Entrepreneurs’ Relief).

Others take the view that it's pointless trying to do long term tax planning using things like Ent Relief as you don't know when or how the rules & rates will change.

A lot will depend on rate and age... ie how close to retirement are you and how badly would the tax be now if you took all available as divs.

**northernladuk** · 13 July 2011, 08:12

You really need to get an accountant sorry.

**SneakySimon** · 13 July 2011, 08:13

Warchest

To follow on from pondlife, I try to always leave enough for around 4 months out of work in case of benched (and ob the CT / VAT etc)

The rest I take as dividends and drop into investment funds. Yes, i take a 20 % hit on tax when I take it out, but my investment funds where I have it in (some ISA, some taxable) have gone up over the past 3 years by 15% (19% this year) so that tax is relatively quickly paid off.

Even if i was getting only 5% interest, with compound interest, I would still prefer to take the money out. I see money in my business account is attracting no interest and so effectivly reducing in value with inflation running currently at over 4%.

But everyone has a differnt philosphy!

**lje** · 13 July 2011, 08:29

You will pay CT on the money irrespecitive of whether you take it out in the year it was received or in a later year.

I take dividends out to take me up to the 40% tax band. I don't take dividends beyond that due to the high tax. Of the money that's left I pay a chunk into pension and the rest stays in the company as a war chest. I also save a chunk of the money which I take out as dividends. This means I pay lower tax and I have savings inside and outside the company.

**DaveB** · 13 July 2011, 08:47

I split the divi income with MrsB up to the tax limit and leave enough in the co to cover salary and pension. A good chunk of the cash that comes out goes into the offset mortgage. Money is there for bench periods and the effective rate of interest is better than I'd get on an instant access account or ISA.

**Greg@CapitalCity** · 13 July 2011, 08:54

Purely from tax

(Option 1) If you could potentially have a gross income from your business that exceeds the higher rate threshold
Purely from a tax perspective, in terms of a warchest it makes sense to store retained earnings in your business account, so you can continue to pay yourself salary and dividends even when you are not working. If you do this your company tax remains unchanged, and you get to keep below the higher rate earnings threshold for personal tax.

(Option 2) If you do not exceed the higher rate threshold even after taking the maximum in salary/dividends that you can
If after taking all your company profits you still do not exceed the higher rate earnings threshold for personal tax then its a moot point - either leave some funds in your business, or route some of your personal earnings into a savings account - the result is exactly the same.

As others have said, its your profits that are taxed, not dividends. So regardless of what you do with your dividends, this won't alter your company tax position.

**craig1** · 13 July 2011, 09:03

I have a simple policy. I take almost every £ possible from the company each year (LLP rather than ltd so a different scenario than most on here in terms of taxation), put away the tax money I need into my tax-only savings account then the rest is split 50/50 between a war-chest savings account and my normal personal accounts.

We know what our outgoings are each month and what we spend in a normal month on other things. I like to keep my war-chest at 12 months of normal expenditure. Once that war-chest hits that 12 month limit then we usually stick the spare money in long-term investments of some kind.

**psychocandy** · 13 July 2011, 10:09

Surely best plan is to take max out until you get to the upper tax bracket for the year. Dont spend it all and stick remainder in savings account?

If you take too much out you;re going to end up paying higher rate tax...

Then whats left in the company can be taken out in subsequent tax years if necessary if you have a bad time (and pay no more tax on it).

Although what happens if in say year 1, you leave 7K in the company? you'd pay 20% CT because its still profit.

OK. Year 2 no income at all. You pay yourself £7K salary out of that money left. But you've already paid CT on that money? and this year you're in effect at a 7K loss. Do you get the previously paid CT back?

Must admit I cant see the value in leaving too much in company account though. (although if you could reclaim CT in the above example it might be worth it).

WARCHEST- best way to build it up