Dividend new tax year

[equinox]

Hi,

I am currently in my first year of contracting.

I am currently paying myself £675 a month salary and the rest in dividends, however since I hit the £40k bracket I have been keeping more money in my business account.

My plan is to keep the accumulated amount, which is around £20k (After paying CTax) in until April 2017 which will be a new company year and then issue a 20k dividend to avoid paying a higher 32.5% rate. Is this the correct way to proceed?

My other options are to take the money out now and pay the 32.5% higher rate dividend tax, however am I correct in thinking I should just wait and pay this in April when I get my new tax allowance and only pay the dividend at the lower rate (£5k free and then 7.5% on the other £15k?)

I spoke to my accountant and he advised that we will discuss it in April, however I really would appreciate an answer if this is the best thing to do.

Any advice is appreciated.

[northernladuk]

Depends on your personal circumstances but if you don't need the money then yes I'd wait till next year and take as much out quickly and put it somewhere it might earn some interest.

But... I highly suspect you've forgotten about your warchest looking at those figures. You need to have at least 6 months money in your company to avoid long periods on the bench. And that I'd 'at least' 6 months IMO. All to often we see people come on here taking it all out and living the high life only to get binned after 2 months and no sign of a gig, crapping themselves because they haven't got enough to live on. In many cases they then start with drawing the money owed to the tax man and it goes badly wrong from there on in.

Number one focus for any new contractor is a good watchest.

[chopper]

You need to have at least 6 months money in your company to avoid long periods on the bench.

Not sure how size of warchest has any impact on length of time on the bench?

I've done contracting for a lick over 15 months now and have built up enough warchest to get me through the next 6-7 months quite easily, which is nice. (The CT is ringfenced in fixed term savings accounts, and I say sod the VATman).

[northernladuk]

Not sure how size of warchest has any impact on length of time on the bench?

Well if you want to be a pillock about it then yes you win.

[Louisa@AardvarkAccounting]

My plan is to keep the accumulated amount, which is around £20k (After paying CTax) in until April 2017 which will be a new company year and then issue a 20k dividend to avoid paying a higher 32.5% rate. Is this the correct way to proceed?

My other options are to take the money out now and pay the 32.5% higher rate dividend tax, however am I correct in thinking I should just wait and pay this in April when I get my new tax allowance and only pay the dividend at the lower rate (£5k free and then 7.5% on the other £15k?)

If you don't need the cash, to keep your personal tax bill down, you are better off waiting until the new tax year when the thresholds effectively reset. As you say, you will then have £5,000 taxed at 0% and the remaining £15,000 taxed at 7.5%, if you remain within the basic rate band. The basic rate is being extended by another £2,000 for 2017/18 so you can take a little more at the lower rates.

If you need cash from the business - don't forget the option of taking a director loan. As you can take up to £10,000 at any point in the tax year and as long as you have returned this within 9 months of the company year end - no BIK implications will apply.

[ladymuck]

The size of your chest does impact bench time. The bigger it is, the comfier your seat will be, and the pickier you can be about your next gig.

The recommendation to have six months' bills in your chest is a pretty good minimum to aim for. Most of the time, if you're not applying for work you can't do or over pricing yourself, something will turn up within that time to keep the wolves at bay.

If you need the cash, take it out. If you don't then leave it be or move it somewhere in YourCo's name that earns better interest. No point incurring tax unnecessarily.

[Cirrus]

until April 2017 which will be a new company year

It's the fact it's a new personal tax year that counts.

I spoke to my accountant and he advised that we will discuss it in April

I'd say you're happy to discuss it in April but not sure why because by then you'll have got a new accountant

[TheCyclingProgrammer]

As everyone else has said, aim to start building up your warchest. If you can live on the income provided by salary + dividends up to the higher rate (approx. £41k after deducting basic rate dividend tax) then aim to leave any net profit above this amount in the company. 6 months is a good minimum, personally I'm not comfortable unless I have at least 12 months.

When you've got a good warchest, if you need to take more money out of the company (say for a big purchase) then you're going to end up paying higher rate tax at some point, but there's no point in paying it if you don't need the money.