Some good uses of my money / Directors Loan Etc / End of year profits

**Nixon Williams** · 11 October 2010, 15:50

You have not provided sufficient details to provide a full response, however:

1. You are probably referring to the £5000 limit whereby the loan does not have to be declared on the P11d. Whilst this is true you need to be wary that you do not accidently exceed the £5000 limit as the loan will then have to be declared, we would generally advise against doing this unless you have very good management of your personal finances.

2. For the current tax year of 2009/10, you can have total income of £43875 before paying any extra personal taxes. Assuming that you take a basic salary of £5715, this leaves £38,160 for GROSS dividends, which equates to £34,344 of net dividends.

Of course if you have only just started contracting through your own company these figures will be different, but your acountant should be able to advise the exact figures.

A more detailed response would need greater details of your income etc.

I hope this helps with your initial question.

Alan

**ratter** · 12 October 2010, 10:17

Thanks for the response NW.

You are correct that I am paying minimum salary and taking the remainder as dividends below the £43875 as you state. I was using umbrella co up until August and my monthly salary and available dividends will be slightly less. My NI and PAYE has already been adjusted for this.

I suppose (and sorry for the woolly response) what I am trying to identify is that with a monthly turnover of around 7K, salary £850 (appx) and dividends, my business bank account is accruing between 2 and 3K every month. Tax returns and expenses aside, even at the end of the year I could have 10K profit sat in my bank account. I don't necessarily want to take this home (would be nice) as I want to stay within the lower taxation band but would like use the money rather than have it sat there doing nowt.

I'll investigate £5000 loan as that could be one means to invest even if it is in premium bonds.

Tax and expenses aside

**Nixon Williams** · 12 October 2010, 11:33

Most people and certainly most of our clients do not like paying higher rate taxes and certainly now that we have the new top rate of 50%.

If your personal circumstances allow it, then restricting your income to keep you below the higher rate threshold is certainly one way to go, however this can then lead to a build up of cash within the company and this also has problems:

1. Many people storing up cash do so with the aim of eventually closing the company and taking the cash as capital and so only subject to Corporaton Tax of 28% rather then a potential income tax rate of 50%.

The 28% can be reduced further to just 10% if you satisfy certain conditions, however a hugh pile of cash can jeopardise the granting of Entrepreneur's Relief, so the cash will be taxed at 28% rather than the more attractive 10%.

2. HMRC are currently reviewing the ESC C16 rules concerning the treatment of the cash as capital rather than income, HMRC are of the view that this system is being abused, with some "accountants" promoting the opening and closing of a series of companies and gaining as a result.

3. This medium/long term tax planning assumes that the tax rules/rates in force today will apply when you come to close the company, recent history shows us that we can not rely on this.

The basis of my point is that you should not necessarily expect today's tax planning advice to apply when you intend to use it.

There is certainly an arguement to take the income now, pay the taxes that apply and pay down debt, however as always every case is different depending upon each individual circumstances.

Alan

**ratter** · 12 October 2010, 11:53

Thanks for that, again sensible advice. I hadn't planned on closing the company with that view although had heard of that.

What about if I wanted to purchase my vehicle and this transfer it to become a company vehicle? As its a van is that another option for freeing up capital?

I'd expect to pay tax on a company vehicle and the use of it for private purposes but that would allow me to free up the capital for better uses.

**Gaz_M** · 12 October 2010, 11:56

Interesting thread & thanks to ratter & NW for your posts to date.

I guess I am in a similar position to ratter & am now beginning to build up funds in my limited company whilst trying to stay below the £43k income bracket. I have never done this in previous years & just took dividends out up to the maximum allowed against my profits & to tell the truth, I'm not sure if I'm doing right now or then.

I'd be interested to hear from fellow contractors which way they think best & why (I know a lot is down to personal circumstances but I'd still like to get a cross section).

**Nixon Williams** · 12 October 2010, 12:00

Originally posted by ratter View Post

What about if I wanted to purchase my vehicle and this transfer it to become a company vehicle? As its a van is that another option for freeing up capital?

I'd expect to pay tax on a company vehicle and the use of it for private purposes but that would allow me to free up the capital for better uses.

This very much depends upon your own circumstances, generally you would be better off to keep the car private and claim a mileage allowance.

Certainly a van is a better option from a pure tax view, certain pickup's can also be treated as a van but you should seek specific advice before opting for this as there are a few traps!

It sounds like you need a good chat with your accountant, to clear these issues up, as they will be more familiar with your circumstances.

Alan

Some good uses of my money / Directors Loan Etc / End of year profits