Ltd company – what to do with any excess earnings?

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  • Ltd company – what to do with any excess earnings?
  • earl_brutus
    Member

    ill look after it for you

    Premier Icon jambalaya
    Subscriber

    Why not keep it in the business for the time being ? Will you be making more profits in the future or might you need some money for capital expenditures ?

    Don’t worry about investment taxes, with rates so low they are not worth worrying about. As you can see the difference between 0 and 2 isn’t worth worrying about, more important to ensure you are not overdrawn in business or outside.

    mudshark
    Member

    How long term are you thinking? Anything more than 2% is going to involve some risk and no point doing that if need access to the money soon. Peer to peer lending?

    craigxxl
    Member

    Take a basic salary and pension contributions reduce your taxable profits then dividends.
    Don’t forget that AIA comes off taxable profits or you could let your accountant work it out for you.

    andybanks
    Member

    Move your personal mortgage to an offset mortgage.

    Then, take out a director’s loan of any un-used capital in the business and put it in your offset account, but don’t spend it.

    At the end of your financial year, pay yourself back in full and then loan it to yourself again the very next day.

    This way you save a hell of a lot more than you would ever gain in a savings account with today’s interest rates.

    brooess
    Member

    Going ltd as a contractor and trying to understand the options for making best use of earnings above and beyond what I need to pay in taxes and live off.
    The obvious option seems to be to take any excess as dividends and put it in a personal savings account (I’m saving to put together a house deposit) but I believe there may be tax implications to doing this and savings rates are dire – c 2% at best.
    Another option is to put into a company savings account but rates look even worse (0.1% APR!)
    For the next few years the excess will be needed for a house deposit so needs to be easy access rather than locked away in an investment.

    Any ideas?

    Premier Icon mrblobby
    Subscriber

    andybanks

    Good tip. Though at some point you will want to get that money out of the company.

    A friend of mine use to periodically wind up his company, make himself redundant, and give himself a nice tax free lump sum. Then just start up a new company.

    andybanks
    Member

    Though at some point you will want to get that money out of the company.

    I just use my LTD company cash as my savings and draw down when needed. The interest rates are so low now it doesn’t matter where I keep it.

    A pension is a good way of moving some capital into your personal possession without incurring tax – although obviously you can’t actually spend it until you retire.

    Premier Icon mrblobby
    Subscriber

    I just use my LTD company cash as my savings and draw down when needed.

    Yeah, just meant to be aware of how much tax you’re going to have to pay on whatever dividend you take and what the thresholds are.

    Oh and if you are new to this and don’t know much about it, do read up on HMRC’s payment on account!

    JulianA
    Member

    I believe that you can take up to £29400 in dividends annually (on top of salary and expenses) before you pay personal tax on your dividends, as long as you pay yourself a salary which is under the income tax threshold.

    Are you going to be in work all year round? (if so, unlucky you!) If you don’t think you will be in work all year round, leave money in the company and pay yourself dividends while you aren’t working.

    I am not an accountant – but my accountant is.

    donald
    Member

    Any profit the company makes within the company year is subject to Corporation Tax. Once you’ve paid that taking dividends (up to the higher rate tax band) incurs no additional tax so keeping it in the company or taking it as dividends is effectively the same.

    If the company pays contributions to your personal pension then it isn’t subject to company tax. If you want to reduce your tax bill then this is the main avenue open to you. In the short term at least the tax man takes less although he’ll get some of it back when he taxes your pension down the line.
    Of course you can’t use it as a house deposit then.

    Premier Icon NZCol
    Subscriber

    Spunk it up the wall on a massive boozy lunch, coke, hookers, the usual. Seriously, you didn;t know that ?

    alexxx
    Member

    Is this kind of thing worth considering if your on circa 35-40k and a sole trader with mainly hours of profit and minimal expenses?

    Andybanks – have you actually managed to do the offset mortgage with company savings? I asked about this recently but my mortgage advisor told me it would not be possible as it has to be your personal savings.

    Premier Icon NewRetroTom
    Subscriber

    alexxx – if you’re on £35 – £40k as a sole trader you’re paying a lot more NI than you need to be and you’d be a lot better off having a limited company.

    Premier Icon NewRetroTom
    Subscriber

    Andybanks – what you’re suggesting about repaying the director loan and then taking it out again can’t be done anymore due to the 30 day rule that came in with the 2013 budget. You’ll get caught by the loans to participators in close companies rules and have to pay 25% tax on the loan (although the tax can be reclaimed once the loan is finally paid off).

    andybanks
    Member

    @petefromearth – it’s not technical company savings as the company has loaned you personally the cash. It is your money that you then pay back to the company.

    I haven’t done it personally as I got a better mortgage deal by locking into a 5 year fix

    @NewRetroTom’s advice however may change all that.

    Can you explain more NewRetroTom? Not heard anything about that and am about to re-mortgage for a new purchase.

    Cheers

    Premier Icon mrblobby
    Subscriber

    I thought it was ok so long as you wait 30 days before taking the loan out again (I think HMRC also require that the new loan not be one you planned to take out when repaying the old one too, not sure how they would prove it was or wasn’t planned though.)

    Premier Icon tomhoward
    Subscriber

    Hookers.
    Blow.

    On the company, of course. You’re welcome.

    Milkie
    Member

    Just gone Limited and as above you can take out 29k in dividends, then make up the rest as your salary. As long as your salary is 8k or more so you pay some NI and a tiny amount of tax its all good 😉 The company will have to pay tax on the dividend, but its a lot lower than your salary tax bracket and the company should be saving more money through going limited. All our savings were passed on to the shareholders. 😉

    Alexx – Hell yes, more and more companies are going Limited for this very reason of tax saving. You will be shocked at how much more a month you would get in your pocket.

    craigxxl
    Member

    You had to repay any monies owed to the company within 9 months to avoid corporation tax. People used to repay and take the money again the follow day. HMRC changed the ruling to at least 30 days repayment.
    Corporation tax was paid on the money owed by the director as well as on the profits. When the loan is repaid the corporation tax on it in previous years is then repayable by HMRC.
    Any loan taken out by a stakeholder would be subject to benefit on kind on the interest that would have been due. 13.8% Class 1A NIC to the company and income tax to the stakeholder. The benefit in kind would also be added to your total income which could push you into the higher earnings threshold.
    If the company was to fail, say due to your ill health, then you would be creditor the company and the liquidator would come after you for the money you had borrowed. If the creditors were high enough you could be banned from being a director in the future and the creditors could seek compensation from yourself as you would no longer be protected by limited status.

    andybanks
    Member

    Another tip if going as a contractor is to get yourself registered for VAT on the flat rate scheme.

    Your clients will be able to claim the VAT back so it’s no difference to them.

    On flat rate you charge 20% VAT and then only pass a lower % on to the VAT man. This % depends on your industry sector but is often 15% ish.

    You cannot claim VAT back yourself, but seeing as most contractors rarely buy anything you’ve just gained an extra 5% margin for doing nothing.

    Depending on your turnover and flat rate band this can be a signifiant amount. An IT contractor billing £7,000 per month would make about £4.5k per year additional turnover.

    http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

    cheers_drive
    Member

    Flat rate VAT is indeed excellent. I’m on 11% (10%) in first year 😀
    If you spend over £2k in one transaction on certain capital expenditure (such as a laptop) you can can claim VAT on that.
    5 months in and it’s all going much better than expected so will have the nice problem of what to do with my excess earnings.

    OP – are you married / in a long term relationship? Assuming you trust your other half and they are a std rate tax payer you can make them a shareholder so therefore minimise income tax.

    mcobie
    Member

    I’ve only skim read the above posts, so forgive me if this has been mentioned.

    If you’re going to use the excess funds as a deposit in the near future (within 5 years) then you’ll need to take it out of the company as director remuneration and stash it away in a personal account.

    Mortgage lenders get very twitchy about deposits being paid from a company account and could cause you issues just at the point when you don’t need them!

    If personal taxation is an issue do you have a partner that could become a shareholding director to also take an income (for work that they’ll obviously undertake for you 😉 )?

    Your accountant will confirm exactly what your income limits are before you have additional personal taxation issues over and above your Corporation Tax.

    IHN
    Member

    On flat rate you charge 20% VAT and then only pass a lower % on to the VAT man. This % depends on your industry sector but is often 15% ish.

    You cannot claim VAT back yourself, but seeing as most contractors rarely buy anything you’ve just gained an extra 5% margin for doing nothing.

    Not quite. You charge the 20% on your rate, but pay the 15% (r whatever you flat rate is) on your turnover (i.e. your rate plus the VAT)

    So, if your basic billing is £5000, add 20% VAT (£1000)and your total invoice is £6000k. You’ll pay 15% of that as VAT (£900), so the ‘margin’ is £100, or 2%

    EDIT – and, of course, you’ll pay 20% corporation tax on that margin…

    IHN
    Member

    If personal taxation is an issue do you have a partner that could become a shareholding director to also take an income for work that they’ll obviously undertake for you?

    You don’t have to be a director to be a shareholder. They only need to do work to recieve an income, i.e. salary. Any shareholder is entitled to a dividend.

    Anyone with excess money can give it to me problem solved.

    catfood
    Member

    And if you do go vat registered you have to have your accounts brought up to date every quarter instead of annually, unless you are earning a good whack any money saved is usually just spent on what will no doubt be much higher accountancy fees, I know a few people for whom this is the case.

    And if you do go vat registered you have to have your accounts brought up to date every quarter instead of annually, unless you are earning a good whack any money saved is usually just spent on what will no doubt be much higher accountancy fees, I know a few people for whom this is the case.

    Unless their business is very complex, they should be capable of doing their own VAT return. As long as your records are in order, it’s easy. Takes 10 minutes online

    b r
    Member

    Take a basic salary and pension contributions reduce your taxable profits then dividends.

    This.

    Also never pay yourself more than the level at which you’d start paying income tax/NI. It was about £37k (remember this is actually net, although paid at gross) all in a few years ago, as once above that you’re giving over 50% away (tax, employer and employee NI).

    As much on expenses as possible, plus buy (better) stuff. Also a motorcycle can be a company expense, with no personal tax implications if used for commuting/travelling, and you get the VAT back on a new one even if on the FRS.

    And the best one was to get another earner into your LTD company. Both myself and my wife contracted, so could both earn the full gross through it; but we didn’t need to both be fully working.

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