What to do with the left over limited company income

[ddolheguy]

Hey all,

I've only been contracting for about 6 months and over that time I've been taking £730 weekly (I take this at the end of each month) out of my company which is split between salary and dividends (My salary is £7,100 for the year and the rest is dividends). All the rest of the money I earn from my contract which per month is quite a bit stays in my limited company.

Currently my accountant has advised I stay below the higher tax limit which I believe is £38K which is fine but I don't know what to do with the rest of the money.

Unfortunately I can't use the spouse payment thingy as my partner also contracts and runs a limited company and funny enough has the same problem as me.

What I'm asking is what is the best thing to do with the residue money in the company? We'd like to buy a property in a year or two and I've read buying property with a company is not worth it.

Should I just take the money out as dividends before the end of the tax year, or should I do something else? And when do I have to do it by (i.e. 5th April 2012)?

EDIT: Oh and sorry to add, I don't have a pension yet (I'm new to the UK), but I'm thinking this might also be a good method.

[DaveB]

Hey all,

I've only been contracting for about 6 months and over that time I've been taking £730 weekly (I take this at the end of each month) out of my company which is split between salary and dividends (My salary is £7,100 for the year and the rest is dividends). All the rest of the money I earn from my contract which per month is quite a bit stays in my limited company.

Currently my accountant has advised I stay below the higher tax limit which I believe is £38K which is fine but I don't know what to do with the rest of the money.

Unfortunately I can't use the spouse payment thingy as my partner also contracts and runs a limited company and funny enough has the same problem as me.

What I'm asking is what is the best thing to do with the residue money in the company? We'd like to buy a property in a year or two and I've read buying property with a company is not worth it.

Should I just take the money out as dividends before the end of the tax year, or should I do something else? And when do I have to do it by (i.e. 5th April 2012)?

Talk your accountant and see what they say. Assuming they are compentent and used to working with contractors they should have some advice for you. Off the top of my head I can think of two options.

Leave it in the Company until you need it, then wind up the co. and issue it as a final distribution on which you can claim Entrpreneurs Tax Relief for an effective tax rate of 10%. Talk to your accountant for the gory details. Then start a new ltd and carry on as before.

You could also sling some of it into a pension. Very tax efficient as it doesnt count towards your tax allowance and the company doesnt pay CT on the amount.

[craig1]

Or alternatively, you could take the hit and take it out at the higher rate of taxation. You'll have to take it out eventually and pay the tax, meanwhile you're generating a pathetic interest rate from your business "savings" account, essentially losing money compared to inflation even before the tax on the interest you pay.

There's no point in bringing in lots of high daily rates if you're just going to sit and sigh at how big your business bank balance is while living on a far lower income.

[prozak]

Leave it in the company for a rainy day or for when you "retire" early or wind up the company.

or use it in the company and branch out with another business idea.

It might not be getting much interest but how many years inflation is it going to take before you lose 25%?

[northernladuk]

There cannot be that much in there unless you are a monster daily rate (something I am doubting). Remember as previously mentioned that you have to leave Corp Tax and VAT in there. You can only divi from profits.

I would give up with any fancy idea's of re-investing. We have gone over everything we can possibly think of to re-invest the money and nothing seems to work well. I think a few guys invest in stocks but houses, cars, collectibles, mortgages.. nothing seemed to work.

Get yourself a warchest up first for when you are on the bench and sit happy on that for the time being.

[ddolheguy]

There cannot be that much in there unless you are a monster daily rate (something I am doubting). Remember as previously mentioned that you have to leave Corp Tax and VAT in there. You can only divi from profits.

I would give up with any fancy idea's of re-investing. We have gone over everything we can possibly think of to re-invest the money and nothing seems to work well. I think a few guys invest in stocks but houses, cars, collectibles, mortgages.. nothing seemed to work.

Get yourself a warchest up first for when you are on the bench and sit happy on that for the time being.

Thanks for that and your right, it's not hugh, although I'm happy with what i've saved so far. I more just don't want to make the wrong decision and end up paying 10% more tax than I need to.

[rd409]

The best thing to do is either

1) Sit on the money in some sort of bonds. Even if you are getting something like 0.5% or 1%, It will take years for the inflation to devalue to the extent of extra tax liability as suggested earlier.
2) Use Director's loan early in the year, invest in bonds, as personal bonds pay you more interest than business. Towards the end, repay the director's loan, so there is no penalty. Repeat this after some time. Speak to your accountant to make sure, you know what you are doing.
3) Open another subsidiary company and invest in that company. Use this as a plan B vehicle.
4) Open a SIPP and use that to invest for long term.


This is what I have been thinking so far. There is no quick way to beat the tax system, so need to plan accordingly. If you are in for a short game, then take the hit and cash out.

HTH.
Dave.

[craig1]

The best thing to do is either

1) Sit on the money in some sort of bonds. Even if you are getting something like 0.5% or 1%, It will take years for the inflation to devalue to the extent of extra tax liability as suggested earlier.
2) Use Director's loan early in the year, invest in bonds, as personal bonds pay you more interest than business. Towards the end, repay the director's loan, so there is no penalty. Repeat this after some time. Speak to your accountant to make sure, you know what you are doing.
3) Open another subsidiary company and invest in that company. Use this as a plan B vehicle.
4) Open a SIPP and use that to invest for long term.


This is what I have been thinking so far. There is no quick way to beat the tax system, so need to plan accordingly. If you are in for a short game, then take the hit and cash out.

HTH.
Dave.

A point for discussion here rather than a definitive statement: Surely you have to pay the tax at some point anyway so why leave it there if you need it? Even if you whip out an extra amount to fill up your cash ISA limit each year then you'll make far more tax-free money than a pathetic business saver acct if you treat tax as neutral.

[Scrag Meister]

Thanks for that and your right, it's not hugh, although I'm happy with what i've managed to retain in the company so far. I more just don't want to make the wrong decision and end up paying 10% more tax than I need to.

FTFY

[prozak]

Surely you have to pay the tax at some point anyway so why leave it there if you need it? .

Do you?

What if I only ever pay myself a wage under the NI threshold and only ever take divis to the max amount (currently 42475 in total for both elements including divi credit) before paying more tax?

The tax has been paid. There is nothing left to pay. Or am I missing something fundamental.

The super long term plan for me, since basiically every year I contract i get two years of wage/divis (at the amount i suggested above) is to work for another x years and then semi-retire potting about for my ltd co doing "something".. like posting on these forums.