Where to stash the (tax) cash

[davethebunny]

Hi all

Going to be moving from PAYE shortly to Ltd company director/shareholder.

Therefore going to be taking dividends which will incur a tax charge.

However, if I’ve got my sums right i will incur a tax charge of approx £4K from Dec-Apr, which will not need to be paid until the following January.

Also due to the lowish tax i will not attract any payment on account in the next tax year, meaning hopefully i can then run a full years tax and 8 months in the bank before i get to having to pay it

What should i do with £1k a month extra in my pay (that is just resting in my account (c) fatherted)

I need to put it somewhere so I don’t spend it but also don’t want it to not ‘work’ for me iyswim

[Douglas Quaid]

I just keep mine in a spare account but a chum of mine leaves it in his offset mortgage account to reduce interest payments.

[LooneyTunes]

davethebunny said:

What should i do with £1k a month extra in my pay (that is just resting in my account (c) fatherted)

You’re planning monthly dividends? If so, make sure you know (and follow) the rules associated with dividends.

My accountant aways advised that it was better (and less admin) to do them much less frequently.

[Sid's Dad]

This probably isn’t what you want to hear, but here’s my best advice:

1. Don’t take monthly dividends. HMRC will be all over you.
2. Make sure you really understand IR35 and what being self-employed really means
3. Don’t ever - ever - dip into the money you’ve set aside for tax bills.
4. Offset mortgage payments are as good as it gets if you have the discipline involved in 3
5. Don’t speculate with it. It’s only there for between one and six months so there’s nothing you could do with it in that time that’ll get you returns worth having - apart from things involving lots of chalk powder and small wraps of glossy paper.

Sorry to be really boring, but that’s what doing this for the last 20 years has taught me. among my many friends in the same situation, ignoring 3 and getting clever with 5 are the ones that have gone bigly wrong - like losing the house wrong. So - no buying bargain M3s and flipping them, no Tesla shares and definitely no fking Bitcoin. I used to buy Premium Bonds back in the day, but nowadays I just shove it an account and get on with my life because the returns just aren’t worth bothering with.

Oh - and one other thing: unless you know what you’re doing, employ a decent accountant, and choose one you’re slightly scared of, and do what they tell you. It shouldn’t cost you more than about a grand a year, and it will probably be the best grand you spend.

Edited by Sid's Dad on Monday 8th November 22:26

Edited by Sid's Dad on Monday 8th November 22:28

[MaxFromage]

Dividends can be taken whenever you like. Worries about monthly payments always come up, but a dividend is a dividend. HMRC don't care.

[Sy1441]

MaxFromage said:

Dividends can be taken whenever you like. Worries about monthly payments always come up, but a dividend is a dividend. HMRC don't care.

Yep, this. As long as it's all accounted for properly in your personal and business accounts at year end.

[Doofus]

MaxFromage said:

Dividends can be taken whenever you like. Worries about monthly payments always come up, but a dividend is a dividend. HMRC don't care.

Some advisers will tell you not to, because if the company subsequently loses money, you may have to pay back the divis you've taken.

In practice, for freelancers/contractors, it's not a risk.

[Mr Whippy]

Premium Bonds would suit the requirements, if you can be bothered.

At least you get same rate as a bank or a bit better.
It’s near instant access.
A chance you win big on top of the decent enough return rate.

[Tim330]

Double check on the payments on account. I thought if you were to owe more than £1000 at the self assessment you have a POA unless you manually reduce it by saying you expect to earn less in the following tax year.

[jrock78]

Used to set aside all my tax into a savings account but the pitiful rates, particularly for the ones that require access were terrible so switched to premium bonds. Managed to win £75 so far in 6 months so all ready better than a savings account.

[davethebunny]

Tim330 said:

Double check on the payments on account. I thought if you were to owe more than £1000 at the self assessment you have a POA unless you manually reduce it by saying you expect to earn less in the following tax year.

yes got that wrong. Thought it was £10k.

I've done a cashflow thing and it looks like even the POA will only affect tax money i've already received, partly due to only having 4 months in this tax year.

[davethebunny]

jrock78 said:

Used to set aside all my tax into a savings account but the pitiful rates, particularly for the ones that require access were terrible so switched to premium bonds. Managed to win £75 so far in 6 months so all ready better than a savings account.

sounds like the best thing to do tbh

thanks all

[chinnyman]

Just had a brief look on a few online calculators. An offset mortgage doesn't save you that much over the mortgage term.
Obviously, risk attached but if you stuck that in an ISA it would potentially earn you more....

[clockworks]

I just transfer a fixed amount each month from my main bank account to another current account with a different bank. My annual self-assessment tax bill has never been more than £1500, so I have a standing order to move £200 each month. This gives me a bit of leeway, and a nice bonus at the end of the year.

I also open a Regular Saver account at the same bank, and automatically transfer the £200 across. Regular Saver accounts tend to pay much better interest. These accounts generally only run for 12 months, so the money's there ready to pay the tax bill. I just have to remember to open a new Regular Saver each year, and set up the standing order.

Another option is to set up a new current account with a bank that pays a decent interest rate on balances. Transfer enough in each month to meet the criteria, and move a couple of small direct debits across from your main account. Move the money you need for bills etc. back to your main account the next day, leaving your tax savings behind. Once you reach the maximum interest-paying balance, set up a Regular Saver.

Sounds like a lot of hassle, but most of the transfers can be automated. Just need to open new accounts etc. annually, and act straight away when the bank inevitably drops the interest rates or downgrades the account.

Money Saving Expert is a good place to find the best bank accounts - sign up for their monthly email newsletter.

[CarlosFandango11]

chinnyman said:

Just had a brief look on a few online calculators. An offset mortgage doesn't save you that much over the mortgage term.
Obviously, risk attached but if you stuck that in an ISA it would potentially earn you more....

There's no point using an ISA allowance for a sum that you need to withdraw in the next year or so and which won't generate gains anywhere near the CGT allowance.

And investing in other equities or other risk assets that you seem to be suggesting could potentially leave you owing more than you have.

[Eric Mc]

MaxFromage said:

Dividends can be taken whenever you like. Worries about monthly payments always come up, but a dividend is a dividend. HMRC don't care.

They MIGHT care. A dividend is a distribution of company profits. If a director/shareholder is claiming that a particular payment the company made to him/her is a dividend, they should have the necessary evidence to back that up.

HMRC states that dividends should be paid following -

a directors' meeting
a formal decision to pay a dividend of a particular value based on available profits/reserves
minutes of the relevant meeting
a dividend certificate

Frequency of payment CAN be an issue but the more important thing is to be able to demonstrate that the payment really was a dividend and not just a cash withdrawal you would LIKE to be treated as a dividend.