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Business Acc Cash over & above the 'slush fund'

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    Business Acc Cash over & above the 'slush fund'

    Hi all,

    Have been contractor for a couple of years now and have a fairly sizeable amount of cash stagnating in the business account with the expected poor rate of interest we get these days.

    Wanted to pick your brains on the positives/negatives of either taking out additional dividends above what I pay myself now at the 20% corp tax and investing that money (whilst still leaving adequate cash in the business for other reasons) or leaving it in there to continue building up.

    The way I see it, unless I have an overly-simplistic understanding, is, if I'm continuing to work for the next 15-20 years, continuing paying myself the minimum salary & dividends, the only way I'm ever going to be able to touch that additional cash is to pay the corp tax as it comes out into my personal account. Better to pay the corporation tax and get hold of it now, where I can invest it and make it work for me, rather than in 10 years or so when I take it all out in one huge chunk for a property etc.?

    Am I wrong/right in thinking this? Would be grateful for any more experienced Contractors to chip in here!

    Thanks a lot

    D

    #2
    You could ask you accountant to run some numbers for you and see what his advice is. Do you not have the opportunity to close the company down in between gigs as long as you don't fall foul of the rules around it? You could take a look at MVL as an option to use some tax breaks there.

    You could also start putting some lump sums in to your pension?

    Here are some threads on MVL

    https://www.google.co.uk/search?q=MV...KgE&gws_rd=ssl

    Some on liquidation

    https://www.google.co.uk/search?q=MV...ss&safe=active

    and so on...
    'CUK forum personality of 2011 - Winner - Yes really!!!!

    Comment


      #3
      Originally posted by DoctorW View Post
      The way I see it, unless I have an overly-simplistic understanding, is, if I'm continuing to work for the next 15-20 years, continuing paying myself the minimum salary & dividends, the only way I'm ever going to be able to touch that additional cash is to pay the corp tax as it comes out into my personal account. Better to pay the corporation tax and get hold of it now, where I can invest it and make it work for me, rather than in 10 years or so when I take it all out in one huge chunk for a property etc.?

      Am I wrong/right in thinking this? Would be grateful for any more experienced Contractors to chip in here!

      Thanks a lot

      D
      Might want to brush up on the basic understanding of your accounts as well BTW.
      'CUK forum personality of 2011 - Winner - Yes really!!!!

      Comment


        #4
        By CT, you actually mean tax on dividends at 25% (net) of anything over the higher rate limit, up to the additional limit.

        Personally, I wouldn't over-think this. There's no easy way to extract the money. If you need the money now, then take it. Of course, if you're planning to recover more than the tax paid upfront, you'll need a good investment strategy, although it's worth noting that personal investments benefit from the annual CGT allowance. You could put the money aside in a pension on the basis that there's a differential in your favour between paying tax later vs. now, but who knows. The other (probably preferred) option is to keep the money in the business and use an MVL in 15-20 years, assuming it's still a possibility (who knows, but perhaps unlikely). The problem with planning long-term is that it relies on a lot of guesswork, so if you need the money now, don't make that decision on the basis of forecasting tax differentials IMHO.

        Comment


          #5
          Originally posted by northernladuk View Post
          Might want to brush up on the basic understanding of your accounts as well BTW.
          LOL exactly what I was thinking.

          It's personal taxation at that point. You've already paid (or will have accounted to pay) corporation tax at 20% on your company profit.

          So, your additional personal tax burden is what you're looking for, once you have crossed the 40% threshold with your basic salary and dividends. This additional burden is normally around 25% of the dividend you choose to pay once you are in 40% territory.

          As NLUK says though, you might want to research MVL, if an opportunity is likely to arise within your intended timeframe.

          Comment


            #6
            Thanks Northernlad/Jamesbrown - some good pointers for reading up on. Will ask the acc to run a few numbers but I think Jamesbrown is right, likely not worth worrying about too much as yet.

            I do understand how well the investments would have to perform to make up for the tax paid to get hold of it, but before I'd heard about MVLs (thanks on that one) I thought it was either pay the tax now or later - better to pay it now and have it invested for 15 years (I'm fairly clued up on investing strategy) rather than stagnating for 15 years THEN paying tax if you catch my drift.

            Also - correct re: brushing up on understanding - few slip ups there, haha

            Thanks again all!

            Comment


              #7
              There's always the other option, of buying an investment in your Limited company. This adds a number of complications, however, and is best discussed with your accountant or tax advisor.

              I've often thought about it though, given that my warchest is earning a pathetic amount of interest each month and we could achieve >10 times return on the money if the company bought a property and rented it out.

              Comment


                #8
                What about investing in a new company? Just found your thread whilst searching to get an answer...

                I've got about 4 ideas for companies I want to start. Might have to post a new thread though as it's quite complex.

                More generally... My thinking is do I want to stick the money in an index tracker (owner by the company) and sit and watch it grow. Or have a go at being a proper entrepreneur and actually risk some capital. ;-) All the ideas I have are between £5k and £10k start up costs and are fairly hands off businesses. I suggest you read "The 4 hour work week" by Tim Ferris for inspiration.

                Maybe someone else will be able to explain - but what I'm looking for at the moment is can you create a subsidiary and transfer cash from the current Ltd co as some kind on loan on the balance sheet. It must be possible - otherwise we wouldn't have companies like Virgin Galactic and Tesla Motors which are making a loss. (though Elon might be using personal cash for that not company cash).

                As other have said - don't get confused with when you personally take the cash and when the company pays corporation tax on profits. This throws up another questions.. If say you made £50k profit this year but instead bought assets to do some new trading activity in the current ltd company - there is a CT Advantage in that the Asset purchase reduces your profits. Not sure if this would apply if you make a loan to a subsidiary though. As in can the loan be written off the profit. I haven't checked yet - but it may work the same as a directors loan as there's something I came across called "Close Company" legislation. As you are a director of both companies they treat it differently to a loan made to an unrelated party. Still trying to get my head around that though so not in a position to advise.

                In general ... I'm not having a much success at googling how to do this. All the company start up advice is for brand new companies and anything about subsidiaries is talking about mega corps like starbucks and tax avoidance. Not much for smaller companies wanting to separate their trading activities.

                Still it might get you into a different mindset than sitting on a pile of cash, you'll get a sore a$$ after a while.
                Signed sealed and delivered.

                Comment


                  #9
                  I forgot to mention the other one... depending on how much you have in the pile .. buy yourself an EV as a company car.

                  I've just ordered an BMW i3-REX due in February. Although the list price is £38,000 the cost to my personal pocket is only £19,500. As in that's the money I could have taken as post tax dividends instead of having the car. Will save me £1,500 a year in Fuel bills, and BiK Tax works out about £300 a year for the next 3 years vs £1,800 for a 120d which is the closest specced car on paper.

                  That £38,000 isn't the base model. Quite a few options - a 120d will come in at £32,000 if you select the same things. But you'll pay a lot more real money for it!

                  The i3 works out like this...

                  £38,000 List price
                  - £5,000 Gov EV Grant
                  - £6,600 First year allowance ... write down against corporation tax for vehicles < 75g/km emissions
                  - £5,940 Saving by not taking dividends at higher tax rate ( I spend the rest of my 20% divs on food and mortgages)
                  =£20,460

                  You then save that £304 per year on the BiK rate bring the total saving over 3 years of£18,452 make the car cost you

                  £19,548.

                  Man maths for ya. :-)

                  Of course all this assumed you wanted to buy a premium hatchback like a 120d in the first place not a VW up or an 1995 525TD.

                  The only downside is the i3 looks like a margarine tub, and definitely is a marmite car. I wonder if it can make toast? I currently drive a Nissan Juke so am used to people saying are you of an un-usual sexual disposition. However anywhere in the rev range it goes like it's a diesel at 4000 rpm :-) 170bhp in an electric car :-)

                  My advice - test drive 1st, then you'll want one! And don't look at the i8 while your in the showroom as that's the one you'll really want, but starts at £98,000!

                  Don't worry about the batteries bit.. the range extender means on trips over 75 miles the petrol engine kicks in to top up the batteries. Gets you 150 before you need to put in more unleaded. I've worked out I'll be doing 8,000 electric miles and year and 4,000 on petrol - assuming I'm at the same client.
                  Signed sealed and delivered.

                  Comment


                    #10
                    Wow, can't see a single thing about that set up that is worth it. Even at 19k for the car out of pocket isn't even close. And after 3 years it's worth less thank 10k!
                    Last edited by northernladuk; 11 August 2014, 13:59.
                    'CUK forum personality of 2011 - Winner - Yes really!!!!

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