£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!

Interesting that the majority of you are saying pension. I get that it reduces CT and also gives me a future pension, but I wish I understood whether that all adds up to around the same, or more, or less financial benefit to paying off some mortgage, as of course paying off the mortgage will save me lots of money on interest. Especially if rates keep going up and up too (the current mortgage runs out in just under 5 years).

Get a new accountant who will give you some proper advice not one who does compliance only

we use https://zebraaccountants.com/limited-company-accountants/ and highly recommend them

That’s a calculation an IFA or a chartered accountant could help with - is your accountant chartered/qualified to advise on tax?

But I think you’re also going to have to solve the ‘learning about money’ issue because you are self employed and it’s so important for your future security and there is information and calculators and education out there to allow you to find the answers.

Pension is good because you save the corporation tax and is a way of then taking money out of your business without paying income tax and NI on it first (although there may be some income tax to pay when you draw your pension down later on).

I money saving experts calculator for working out what you save from mortgage overpayments. You’ll have to pay dividend tax on your money first though which would reduce the amount you can overpay.

I like the vanguard calculator for working out what money put into a pension could earn me in retirement.

Maybe you could have a play with the calculators, ask your accountant what the costs/benefits are of taking the profit out vs pension payments are, and then find an IFA? Check out smart purse who have female advisors that will just explain everything (for a fee) without selling you products.

Pension.

You say you find the words used in pensions & investments “boring” but most of us don’t find them fascinating. It’s just a grown up thing you have to read about & make yourself understand.

Pension.

Reduces Corporation Tax which is now @25% (assuming you are still making profits). The money in the pension should (if invested well) earn more for you than the interest you are paying on the mortgage. Either speak to an IFA or self invest via someone like Vanguard.

Don't pay higher CT and dividend tax when you don't need to!

You will also have carried forward allowances on pension contributions (prior 3 years) so can make more than the £60k current annual contribution limit.

I'm an accountant and work in the FS sector....

and agree - don't follow LemonSwans advice unless you are comfortable with wondering at any point if you might face an investigation

Thanks so much to all who've posted.

@SummerSazz what you said re a well-invested pension earning me more than the mortgage interest is EXACTLY the kind of advice I was hoping to get from this thread, so thank you enormously. Your post, along with the majority here saying pension is nudging me in that direction.

@bowlingalleyblues thanks so much for posting info on those calculators, they sound exactly the kind of thing I need to help me better understand and compare. And smart purse looks excellent. And you and @FrownedUpon are right - I need to take the time and force myself to learn this stuff! (Damn)

Thanks all. Had no idea that wasn’t legit. Have heard of quite a few people who do the same and thought what a good idea!

I suppose maybe too good of an idea 😂

Most Ltd company directors pay into a pension to a) have a pension in the future and b) reduce their corporation tax liability.
I know you said you struggle reading about pensions and investments but you need to be aware of the basics, e.g. what is your annual allowance, and also how to optimise your salary/dividends so as not to pay too much tax. Maybe try to keep your reading in bite size chunks?
Some of the money you put in a pension can be taken as a tax free lump sum when you reach retirement age, that could help with your mortgage.

Just found this and it says there can be different rules for controlling Directors (which I presume you are). Haven't read in full or followed any links but may be useful 😊

adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/pension-contributions-the-basics/

A decent accountant should give you all this advice and more! Please check your accountant is fully qualified, preferably with the Institute of Chartered Accountants (ACA or FCA). They can give you independent advice on pensions and investments.

A pension is probably your best solution, but an accountant will know your particular circumstances much better than an Internet forum!

@roundcork would you mind DMing me the name/website for your accountant?

Interesting that a few of you are saying get a new accountant. I'm on my second accountant and neither of them have been able to give advice about pensions, so I wonder if there are different types of accountants? The two I've used just do basic filing of my accounts.

Accountants shouldn’t be giving advice on pensions other than the basics. A tax adviser can do more in terms of calculations but we still can’t give proper advise on pensions, it’s the job of an IFA really.

Oops *advice.

Also just seen another comment saying a good accountant will give independent advice on pensions and investments - that is absolutely not true. Accountants and tax advisers should never ever advise on pensions or investments further than the basics. I would get in trouble if I did!

IFA for pension advice but accountant should be able to tell you about the the implications to the business. Just an FYI I’ve thrown surplus money from my business into my pension each year. This year £40k last year £20k (kept more in the business for the running of it) but actually didn’t need to (business is only two years old so needed to be mindful of what might crop up this year). My IfA manages my pension for me based on my risk profiling.

Yes OP's accountant can't be advising her what to do but they should have been discussing options with her for her business when they saw the bank balance building but not being used/withdrawn etc

Pension most definitely