Keeping money in the company

[chris79]

Myself and my partner both work for our own limited company doing contract work.

The plan is to save a bit of money up in the company so that if anything goes wrong in terms of work we can still pay ourselves a salary out the company etc.

The question I have relates to interest... Assuming I have £100,000+ in the company bank account what is the best thing to do with this? Should I get it moved into a good earning interest account, and what are the tax implications on any interest earned?

Also if the company had say £180k, what is the best way to get this out paying the least tax. Would I be right in thinking to pay it as dividends up to the higher rate tax bracket using both our tax allowances over a number of years?

thanks.

[chicane]

What you describe is what I plan to do - just stash your surplus in a reserve account and pay divis up to the higher rate tax band every year. I'm not aware of any other foolproof options.

You may like to look into taper relief, but make sure you understand what's involved before going down that route.

Also bear in mind the impending increases in corporation tax over the next couple of years.

[chris79]

What you describe is what I plan to do - just stash your surplus in a reserve account and pay divis up to the higher rate tax band every year. I'm not aware of any other foolproof options.

You may like to look into taper relief, but make sure you understand what's involved before going down that route.

Also bear in mind the impending increases in corporation tax over the next couple of years.

Yes, from what I can gather it will be 22% by 2009... My plan will run beyond this so I accept the fact I will be paying more tax, but altogether it's not a bad situation to be in. We'll have a choice, either pay it out as a lump sum and pay off the mortgage, or use it as a means of income security for the years ahead. It probably makes more financial sense to pay the mortgage off though as my fixed rate at sub 5% ends in about 3 years from now.

[IR35 Avoider]

I saved money in the company in the late 1990's, then for several years have not been able to get it out (without paying higher rate tax.) I'm looking forward to finally getting the remainder of the money out in March and April next year. It will be a huge relief to have a company that's worth nothing once again. I reckon a large bank balance is a temptation for an inspector looking to raise money from an IR35 investigation, S660 investigation, whatever-retrospective-reinterpretation-of-the-law-they dream-up-next investigation, etc.

Also, company savings accounts pay far less competitive rates.

You're obviously very confident about your IR35 position. In your position, if I thought there was even a small chance of being caught, I'd put the "savings" (what's left after paying self and spouse 40K each in salary and dividends each year) into a pension, leaving the company account close to empty most of the time. If I were investigated (say for IR35) I would immediately switch my current contract to a new company so that new funds had no risk of being applied to employers NI bill on previous income. In fact I've proposed in these forums before that given the real uncertainty that IR35 creates, even to a director trying his best to decide his status in an unbiased way, it would be commercially sensible to have a separate company for every contract, so profits from a "pass" contract are never at risk of paying the bill for a wrong decision on a "fail" contract.

[chris79]

It's interesting information there thanks.

My own position is that I do my best to stay outside IR35 in the way I conduct business. I'm on a 12 month rolling contract which looks to be quite long term which is my only concern, but as the business pulls in funds from multiple sources due to the fact my other half does some consultancy work, I feel I can justify it as a legitimite business, not just a bum-on-seat contracting job.

I'll look into what you've said in more detail because protecting my income is something I need to consider, despite the fact I feel the risk posed is quite low.

cheers,

chris.

[chicane]

as the business pulls in funds from multiple sources due to the fact my other half does some consultancy work, I feel I can justify it as a legitimite business, not just a bum-on-seat contracting job.

Remember that IR35 assesses the merits of each contract individually.

[IR35 Avoider]

I don't think the fact there's money coming in from sources other than your contract makes any difference to whether the income from it is caught by IR35.

[chris79]

I'll take the risk, I've got insurances to cover me up to £75k legal should I need assistance to defend myself on such issues such as IR35. I think the risk is very low, and from what I can see my main contract is very much outside IR35 with things such as substitution clauses in place etc.