Worried about debt / pension contributions

[newname2668]

I run my own business and absolutely love what I do, but I am concerned about my personal debt / pension situation.

I have 2 preschool aged children. Since the birth of my first child, I have taken quite a big step back in my business and I now only go in 2 days a week. I do all childcare on the other days. I love that I am able to spend so much time with the kids so I don’t plan to return to work full-time until they are both in school. However my personal earnings have reduced as a result. My official salary is £1k per month but I can take dividends on top of this. I used to be able to take reasonable dividends but now I work fewer hours, I’m having to pay higher staff costs. This means that there are some months that I don’t take a salary because cash flow can be tight. I do have months where I can take a few thousand out as a dividend and that will tide me over for several months, but I feel like I don’t have a predictable, reliable wage.

My husband earns 70K but works very long inflexible hours. He pays the mortgage and all big bills plus our socialising and holidays. I pay for half the food shops, running my own car/phone and kids clothes and activities. However I was irresponsible when I was younger and have over £25k in credit card debt that I keep bouncing from one 0% card to another. I am really making an effort to get rid of it this year and that’s where most of my wages go.

I have £19k in a pension plan from my old career and have only recently started paying into a pension through my business. However it’s only £36 per month because my base salary is so low. I have no idea what level of contribution I should be aiming for in order to provide enough for retirement but I’m fairly certain £36 a month is insufficient. My husband does have a more substantial pension pot and he pays in at least 10% but I don’t know that it will be enough for the both of us to live off come retirement age?

I’m worried that I need to increase my pension payments, but if I do so, my debt repayments will reduce. I feel like I’m stuck in an endless cycle of credit card debt that I can’t seem to shift! I have looked at debt charities but most of the options available will have an effect on my credit status so I don’t want to go down that route.

I have seen people talk about their husbands paying into their pension on MN before. How does this work? Would there be any benefit tax wise for the husband in doing this?

I don’t really know what my question is, and I know that really, the only way to improve my finances is to put the children in to childcare and work more hours. But if anyone has any other sage advice, it would be gratefully received!

As a family, they're handing over £20k tax per year to fund other families to have a 3rd child, which they're being told they can't afford for themselves. I mean, WTF?

Well let's be honest here, you are avoiding paying 20% tax like the rest of us PAYE mugs, because the tax payable on dividends is lower. So yes well done you but know that your 'tax efficient' set up is just legal tax avoidance.

I don't think the situation is that bad, OP. You are paying your debt down in a fairly cost efficient way with 0% cards, whilst only working two days a week. You have a successful business that stays afloat while you spend valuable time with your DC. Your DH earns well. Your business has resale value. You are entitled to half of DH's pension if you divorce, which indicates it should also be viewed as a shared asset within the marriage. All pretty good. You just need to jig things around a bit and figure out how to pay the debt down quickly so that you can contribute more to your own pension. If I were you I would probably work a third day and try to reduce some of your staffing costs and be a bit more involved in increasing turnover. A third baby is an emotional decision as much as a financial/practical one - if it was only financial/practical no one would ever have any! But, speaking from experience, three DC can really tip the balance in the family - it's MUCH harder work than two and that might impact how much energy and time you can put into your business in the future, especially in a few short years when you are nearing 50 and energy levels tend to drop off a cliff.

I'm not sure anyone has recommended the Rebel Finance School to you. It's been a game changer for us. It's free on YouTube and will teach you all the reasoning for the things wise people on here are saying. Then you can quickly make your own plan but also make informed decisions based on your own values.

You’ve massively ignored the difference in risk profile between dividends and salary.

Yes you pay more tax under PAYE, but when was the last time your employer told you they couldn’t pay you this month as the business has no money? OP says this happens regularly to her. You honestly think this sort of unstable income should be taxed the same as your stable income?

And your employer gets to deduct your salary from their corporation tax bill and save 25% tax there. OP doesn’t get to do that with her dividends, so yes she pay 8.75% tax on her dividends, but the company has also paid up to 25% on that money - so that’s almost a 32% rate of tax. That’s actually more than the 28% you’re paying on your salary. (The saving is the employers NI that OPs company isn’t paying on her dividends).

So it’s not some amazing tax wheeze that the OP is onto - it’s a tax rule that reflects dividends are a less stable and therefore less attractive way to get paid, so they get taxed less.

Also, by the time she's paid 19% corporation tax (dividends come out of taxed company profit, whereas salary reduces profit) and then 8.75 dividend tax (with a £500 allowance), it's pretty close to the 20% tax + 8% NI she would be paying as a basic rate taxpayer. Maybe £150 per year. I think that's reasonable thanks from the taxpayer for creating jobs for several other people.

(£150 per year difference between taking it all as salary - which doesn't really make sense given that it's variable - versus taking dividends when the company can afford it)

OP be aware that paying into a pension as an employer contribution is a lot more tax efficient than paying off a debt from post tax money as you save the 25% corporation tax on the pension contribution as it comes off your company's net profits.

Sounds like you need to work when your husband is home for the kids tbh.

Yes I agree and I definitely do… When I say I go in two days a week, that’s just the time I’m physically present in the building. Once the kids are in bed, I’m on my laptop until I go to bed. And I’m often up before the kids working in the morning too. And then I spend all day replying to team WhatsApps whilst juggling the kids also. I have been working Sundays for a lot of the year but I have finally taken someone on to replace me on weekends because my husband is away so much during the week, and it’s been hard only seeing each other 1 day a week. My husband has also been known to take holiday so that I can go in when I need to.

Yes to all this… thank you.

I also pay a very significant sum to HMRC in VAT, employers PAYE contributions, corporation tax etc. I believe everyone should pay their fair share in tax and to say I’m avoiding it is unfair.

This sounds really interesting. I will definitely check it out, thank you!

Corporation tax is 25% for companies with profits over £250k, but only 19% for a small company like OP's with profit under £50k.

OP - speak to your accountant about what works best in your circumstances. They're usually happy to talk through your options if you're paying a monthly amount rather than just paying for once-off accounts.

Id also check out Financielle - they have an app and a podcast which is really good and focused on women’s finances.

It’s much much harder once the kids are in school (compared to nursery hours).

I am self employed and my income dropped in early school years

OP I’m following for advice as we are in our forties and very worried about retirement also. I have a pot of about £60k but calculations suggest I need £400k to sustain our current lifestyle 😵‍💫

This situation is quite different to the one you described in your OP 'I do all childcare on the other days. I love that I am able to spend so much time with the kids so I don’t plan to return to work full-time until they are both in school'.

I can’t understand why you think you need to borrow from your husband and then pay him back. Is he going to pay you back for your loss of earnings so he could work full-time? How much have you saved him over the years? I bet he owes you a lot more than the debt.

Perhaps you’re misunderstanding but both of my statements are true…

If a £600k revenue business cns only afford to pay it's leader £12k a year then the business is failing or being run very inefficiently.

Having said that the £1k a month she mentions is a tax evasion strategy not because the company can't afford to pay her more so she should start taking money out as dividend not expect her husband to subsidize her while she runs a £600k business and only "chooses" to pay her self £1k a month.

If the company truly can't afford to pay her more than £1k a month which I don't believe then it's a zombie company that is being subsidized to prop it up. And she either has to make some though decisions to reorganize the business so it's more efficient and profitable or close or it down but as I said I'm sure the £1k is purely a tax evasion tactic.

Taking dividends isn't tax evasion. "Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be" (Westminster doctrine)

Dividends are perfectly appropriate in her situation, in addition to her £12k per year salary.

Not that it matters to the principle, but as I explained: once you've paid corporation tax and then dividend tax, it doesn't make much difference versus salary to your take home anyway.

It's also perfectly normal for a business to make no profit at all for several years when it first starts, or during difficult years (which would include years when the founder is focused on young children and can't put so much into the business). The biggest, most successful companies which employ thousands will all have started that way: with huge personal commitment, unpaid (at the time) hard work and investment from the founders.

Which is exactly why our tax system should reward the risk, upfront graft and commitment of entrepreneurs, who create our economy: one sale at a time.

You must have heard the saying “turnover is vanity, profit is sanity”. The overhead costs are key so not hard to understand why OP’s own income is limited.

But she's not. She is paying someone else to do the job OP would have been doing had she not reduced her days, she is also taking out dividends in addition to the 1K. It's not a failing business and taking dividends is not tax evasion. It's basically money that is left over after everything else has been paid for. As a business owner it can be hard to calculate your exact revenue and foresee all cashflow issues so it's smart to let some of the money stay in the business and then withdraw it when things are clearer.

@newname2668

the current rule of thumb is C£350k of capital for an annuity of c£10k a year. Work out what lifestyle you want in retirement and you can then work out how much you need to have in your pension pots between you.

I think the biggest issue is you’re not working as a team. The whole “he pays for x” and “I pay for Y” just isn’t conducive to family financial planning. If you were earning equally it might work, but you’re taking a huge financial hit in the long term right now.

I would sit down and come up with a joint plan, the debt becomes joint (that’s just marriage, just as childcare has seemingly become your financial burden, that should be shared too). Together work out your debt plan, childcare costs (ie drop in income), retirement plans etc. That needs to happen before you have another child, you on your own can’t afford a 3rd child, but you and your husband should be able to.

The op is not a mug for using legitimate tax avoidance measures, particularly when her business is paying not only the salaries but also employer NI and pension contributions for several employees.

The op is taking a sensible lawful approach to how her business and income are structured.

Having said that I think this approach also needs to extend to the op’s debt repayment and pension provision.