£100,000 in my business account - wisest way to spend it

[MoneyFool]

Background: I'm not very financially savvy/knowledgeable, don't have any ISAs, don't understand investments or pensions, I find all the wording around investments and pensions boring and if I try watching videos or reading articles on those topics I can't finish them (may have ADHD).

Over several years I've built up a surplus of £100,000 in my business account (I have my own limited company).

I have three options in mind for this money and am not sure which one will serve me best:

1. Start a pension and pay max allowance in each year til surplus is used
2. Keep saving surplus until the amount will buy me a small investment property (may take a long time as am working less and costs have increased)
3. Use surplus to overpay on mortgage each year

Last two options will mean paying 33.75% dividend tax on the £100,000, so will reduce the available amount to £66,250

I'm early 50s and have a mortgage of around £339,000 to pay off in the next 16 years.

What is the wisest thing to do with the surplus?

ps this is kind of unbelievable to me that I'm in this situation as about 14 years ago I had no job and a huge pile of debts!

I’d do the pension option. A) because you’d be mad just to rely on the state pension when you come to retire and b) also mad to forfeit c£35,000.

are you still working and making as much money?

Will you pay down your mortgage if you carry on as you are?

I’d hire an accountant to go over the options with you.

Get an IFA/accountant.

They'll be able to advise you properly.

But, I'd be thinking about my pension for sure in your shoes.

Option d),

Turn your personal mortgage to an offset mortgage. Take all that capital and place it in the mortgage as a directors loan. Repay it to the company for the week of accounting and redraw again.

ie. the effect of paying off the mortgage but not actually paying tax on it.

In the end sell the company with the surplus cash included. And you will then be eligible for entrepreneurs tax relief, then you can pay off the mortgage entirely.

And option d can also work to option b as your cash is still liquid; which also works to option a as the income from the investment property can be part of your ‘pension’.

But yes I would talk to a good accountant because there’s ways to do all that super efficiently. You can have a pension or trust fund which holds the investment properties for example.

Thanks for the posts. Do IFAs/accountants actually advise on this kind of decision?

I have an accountant but she will only do my accounts and not advise me on anything.

Whenever I've looked into IFAs it seems they're tied to advising on a particular product e.g. getting a pension or getting a mortgage, or insurance products.

Nobody seems to provide actual advice on what to do if you are clueless.

@LemonSwan that all sounds interesting (and mysterious). Not sure if I could sell my company as it's just me as a person who works in IT being a contractor - there's no other product or service. So don't think anyone would want to buy it.

ps I probably should have said in my original posts that as it stands right now my options for my pension are... 1. hoping my parent doesn't need to spend his estate on a care home so I have a healthy inheritance or 2. paying off mortgage and moving to a smaller house or cheaper area and using whatever ££ is left after the house sale.

Contributions to your pension will reduce your corporation tax liability. Your accountant should be advising you on this sort of stuff.

I’d want a state pension, private pension, PLUS a lump sum from downsizing/inheritance when I retire. Not 2 out of 3. It depends on what you want your retirement to look like.

You need a good IFA, an accountant wont do advice.

I've texted my accountant to ask if she knows a good IFA who can help.

It doesn't help that I feel so damn stupid talking to these types of people. The main side of the family I grew up with are/were mainly on benefits, I don't really have an adequate mental model to know what I want my retirement to look like, I've grown up around managing on next to nothing, it's what I'm used to.

I like the idea of being a proper grown-up who makes good decisions around money but am so daunted and intimidated by it all.

I think I would place £50k into premium bonds- chance to win every month (top prize is 1mill) and usually get high above the savings interest rate. Better money security too as it’s a treasury rather than a bank. If you invest the max for 20-30 years you could likely build yourself a nice little pension from your winnings.

The other £50,000 I think I would either put into a lifetime ISA as another pension lump sum or use to pay off some of the mortgage

Hi @MoneyFool
My DHs advice (he's a business tax consultant).

He thinks that Lemon Swan's advice is risky in terms of tax law - the risk is that you would be taxed.

There are IFA companies that will give you advice about a range of financial products but you need to do some research to find them (if you Google some you can contact them and ask what they do. You need someone who will spend time with you to work out what products will work for you).

Most IFAs will not give tax advice so you may need to find that separately.

It sounds like you have made a huge success of your career in a short time- brilliant!

Pension! No question

Apologies I didn’t see they age 50 part! Scrap the lifetime ISA then… I would go 1/2 bonds 1/2 mortgage.

Congratulations also OP, you’ve obviously worked hard and I wish you every success with your business

I now wish I'd said in my original post that I worked out what this year's max overpayment would do on reducing interest costs overall:
£33,999 mortgage overpayment
Saves £21,334 in interest
Costs £8,814.55 in dividend tax
Saves £12,519.45 after dividend tax
Reduces length of mortgage by 2 years

Thanks so much to anyone posting, I appreciate it.

Use a small amount to get a proper financial advisor.

You should speak to an ifa

Don’t follow lemon swans advice, you’d have a beneficial loan interest charge from the company https://www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates/beneficial-loan-arrangements-hmrc-official-rates. The company would also have s455 charge of 33.75% if you repaid and re borrowed it.
put it in a pension, you can put £60k in this tax year and if you have an active scheme (even from a part time student job) you can use any unused allowances from the past 3 years. The company could then do a loss carry back claim on the CT as it would presumably create a loss. You probably need a new accountant though.

As an accountant we can tell you your options but not advise which to go for, your accountant probably has an IFA they make referrals to so I would be trying to have a chat with them.

Also please don't feel stupid talking to your accountant/IFA you are certainly not alone in having no clue how things work, that's what we are there for! I don't have a clue when it comes to most things IT related, we can't know everything about everything and the most important thing is you are making a move to get more organised now. I have to say its a bit rubbish your accountant hasn't previously spoken to you about planning/what to do with the money sat in the bank.

Pension for sure!

I have a similar situation. I use the company money to make annual pension contributions to max which then reduces the Corp tax, and the contribution gets grossed up.

Pension, savings, short term and long term.

How much do you need for working capitol?

The best option is for the company to pay into your pension. A good option as it reduces the CT liability.

Any other option means extracting it from the company via salary or dividend, which you would be taxed on.

(I’m a tax adviser).