What amount of dividends do you pay yourself?

**Wanderer** · 28 June 2011, 20:15

Originally posted by MiniMani View Post

I am after the views of people that actually do this on a monthly basis...do you just divide this by 12? Ignore this and pay yourself more? etc etc....

You can take the dividends any time that there is profit in the company to pay them out of. That doesn't mean "money in the company bank", that means actual company profits as calculated by your accountant.

The limit that your accountant talks about is one to be wary of. If you go over this then you will be hit with higher rate tax on your dividends.

Many contractors who could potentially be higher rate tax payers pay themselves up to the higher rate tax limit and then retain the rest in the company.

Once you've built up a big stash of money in your company, what to do with it is a tricky question. If you take it out then you're going to be liable for a big tax charge.

There are a number of options, you should take professional advice on how to operate them efficiently:

1. Keep it as a war chest to draw on when you are not earning due to holiday, sickness, unemployment, pregnancy, retirement etc. Probably the most common tactic and a good move in my opinion.

2. If you have a spouse/partner who earns a low income then make them a shareholder and pay them a dividend and/or salary.

3. Put the money into a pension

4. Retain it in the company and then apply for ESC-C16 when you've finished contracting (though ESC-C16 may be withdrawn in the future)

5. Find a way to invest the money you've retained in your company

6. Start your own business using the capital you've built up.

Things you can't easily do are:

1. You can't borrow the money from your company indefinitely, including putting the company's money in your personal mortgage offset account without careful planning. (You can take short term "director's loans" though - do a search here or ask your accountant).

2. You can't have the company buy a house which you then live in, rent free on a wink and a nudge.

**Jaws** · 28 June 2011, 20:58

In the past, I paid what I needed quarterly but only up to around the upper earnings limit. The actual dividend amount generally varied each time.

Eventually there was enough retained profit in MyCo's account to switch to an annual dividend frequency. Which is my approach these days mainly because I've got an offset mortgage.

**Bexter** · 28 June 2011, 21:26

I still struggle with this concept and the views of some on this. Whilst I agree with Wanderer above, that those are all viable options of what to do with the money, I don't see the point.

Part of the reason I moved into contracting is to earn more, so I can enjoy life more! Not to limit my income to £46,750 (or whatever it is!) per year, I could have stayed perm for that! What's the point of leaving all the money in the company, other than it being just a safety net. Short of putting it all in a pension, I don't see how you can ever get away with not paying the tax, so I just take it out and pay higher rate tax on the divs. That way it can at least earn interest in a personal savings account.

I do leave a small amount in the company for holiday, sick days, etc, but in general, you'll never not have to pay tax on it, whether you pay it as you go, or by taking out a whole lump sum in x years time, so whats the difference?

**northernladuk** · 28 June 2011, 21:31

Originally posted by Bexter View Post

I still struggle with this concept and the views of some on this. Whilst I agree with Wanderer above, that those are all viable options of what to do with the money, I don't see the point.

Part of the reason I moved into contracting is to earn more, so I can enjoy life more! Not to limit my income to £46,750 (or whatever it is!) per year, I could have stayed perm for that! What's the point of leaving all the money in the company, other than it being just a safety net. Short of putting it all in a pension, I don't see how you can ever get away with not paying the tax, so I just take it out and pay higher rate tax on the divs. That way it can at least earn interest in a personal savings account.

I do leave a small amount in the company for holiday, sick days, etc, but in general, you'll never not have to pay tax on it, whether you pay it as you go, or by taking out a whole lump sum in x years time, so whats the difference?

I am glad you are so confident in find end to end roles and that you can survive a couple of months on the bench. Not all of us can.

Stay around long enough and you will see the odd post that crops up about someone having to sell the car and even the house due to some poor cashflow management.

**JoJoGabor** · 28 June 2011, 21:34

I aim to leave about £20k war chest in the company, en take the rest as dividends, which is more than the £30something k per year, I need to enjoy that money!!

**MiniMani** · 28 June 2011, 21:34

Originally posted by Bexter View Post

I still struggle with this concept and the views of some on this. Whilst I agree with Wanderer above, that those are all viable options of what to do with the money, I don't see the point.

Part of the reason I moved into contracting is to earn more, so I can enjoy life more! Not to limit my income to £46,750 (or whatever it is!) per year, I could have stayed perm for that! What's the point of leaving all the money in the company, other than it being just a safety net. Short of putting it all in a pension, I don't see how you can ever get away with not paying the tax, so I just take it out and pay higher rate tax on the divs. That way it can at least earn interest in a personal savings account.

I do leave a small amount in the company for holiday, sick days, etc, but in general, you'll never not have to pay tax on it, whether you pay it as you go, or by taking out a whole lump sum in x years time, so whats the difference?

Thankyou for your viewpoints so far... interesting. Wanderer I really appreciate the detailed reply and not being ridiculed for asking a silly question!

On the other hand, what Bexter said - I was eagerly awaiting a much higher salary and leaving it all in the company account pains me, especially as I was going to treat myself to some new handbags

so i'm torn...! Although if I understand correctly I can take a director loan for up to £5k (although not sure on the frequency of this off hand?)

**Wanderer** · 28 June 2011, 22:59

Originally posted by Bexter View Post

Part of the reason I moved into contracting is to earn more, so I can enjoy life more! Not to limit my income to £46,750 (or whatever it is!) per year, I could have stayed perm for that! What's the point of leaving all the money in the company, other than it being just a safety net.... you'll never not have to pay tax on it, whether you pay it as you go, or by taking out a whole lump sum in x years time, so whats the difference?

The idea is that one day you will be able to take it out when you are no longer a higher rate taxpayer. The other thing that may happen is that you take a year off work (children, holiday, career break, illness, charity work, study, who knows what) and pay yourself out of the retained funds thus avoiding paying the extra 25% of your company's fees to the tax man.

I know what you mean about getting your hands on the money though, been there, done that and got a tax bill so big that it made my eyes water.

Originally posted by MiniMani View Post

Although if I understand correctly I can take a director loan for up to £5k (although not sure on the frequency of this off hand?)

The short answer is yes, you can take up to £5,000 as a directors loan but if you take a penny more than £5k at any time during your tax year then it causes complications so be very careful what you do. You can potentially borrow a lot more money than this via directors loans but you need to get specialist advice on this one...

Have a read of these posts about directors loans, there are lots of others too:

http://forums.contractoruk.com/accou...-mortgage.html
http://forums.contractoruk.com/accou...ml#post1300277

**JamJarST** · 29 June 2011, 07:26

Originally posted by northernladuk View Post

I am glad you are so confident in find end to end roles and that you can survive a couple of months on the bench. Not all of us can.

Stay around long enough and you will see the odd post that crops up about someone having to sell the car and even the house due to some poor cashflow management.

I sort of see Bexter's point though. I will be drawing enough to cover my cost of living and to have a good standard of living and if this makes a higher rate taxpayer, so be it. I do agree with you though on keeping as much as possible in the company accounts for my war chest, no point earning interest in a personal savings account if you can keep it your companies savings account.

**Bugbait** · 29 June 2011, 09:38

I pay dividends up to the higher tax limit (£46k or thereabouts) each year and occasionally go over when required, ie. This year since I’m renovating the house. I move a couple grand into a pension each month as well since the long term tax savings are significant.

What amount of dividends do you pay yourself?