Can anyone calculate percentages better than me please?

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This year I will have a decent chunk of money in my business account, and the only way to take it out would be to pay 40 percent tax on it (because I’ve already paid myself up to the threshold this year) should I:

A, leave it in the business, so if I have a lean year I can use it to pay myself at a lower tax rate

B, pay 40 percent tax on it, and use it to pay off a chunk of my 5 percent mortgage?

(I really want to make a dent in my mortgage- if it’s not a stupid thing to do)

Ie - overall, will I save more money if I pay 40 percent tax to pay off a chunk of a 5 percent mortgage, OR is it more cost effective to keep paying the mortgage and leave the money on a lower rate of tax over time?

Does this question even make sense?

Background: I am self employed and earning well, but dyscalculate- genuinely very challenged with numbers and calculations but also the general systems and processes around them. (Imagine a brain that struggles with left-from-right, can’t read a clock face, but can get multiple first class degrees)

I have an accountant but she’s not v transparent about billing and whenever I ask her questions my bill seems to go up a lot. I’ve had some advice on here, and I am wondering if anyone knows their way around numbers and would think it through with me...

So
You pay yourself £1000.
You get to keep £600 the government gets £400.
You use the £600 to pay down the mortgage saving £30 of interest.

No doesn't make financial sense.

If you are self employed you will pay tax on it regardless.

If you are a director and shareholder of your own limited company then you aren't self employed. In this situation if you are only wanting to accelerate access to the cash and not take extra then you could consider a loan from the company to be settled by salary/dividends next tax year. There are implications but if managed then they aren't onerous.

@TeenDivided wow.
So just so I understand, I would effectively be spending 400 to save 30 quid in every thousand if I took the money out the business at the high rate?

Accountant husband says leave it in the business as you will waste so much money by paying the higher tax rate.

Do you have a spouse/partner who you can pay using this money as a salary, ie as an PA? Obviously you’d need to trust them to use the money to pay off your mortgage!

That is my understanding.

However would there be tax to pay if the money stayed in the business eg does it count as taxable profit otherwise?

@Chasingsquirrels you're right. I am a ltd co with no other shareholders.

So you are saying def don't take it out at the higher rate, and consider doing the loan thing to pay off the mortgage a bit?

Is the saving enough to suggest this to my accountant?

Thank you in advance

Amazing husband, thank you @NottsNora. As soon as I find one as smart as him I'll marry them, but at the mo I'm on my own... 😂

How lean are your lean years? I'm not an expert in running a small business but presumably unless you have some very very poor years you'd be paying 20% marginal tax on income each year anyway - so the "cost" of taking it out this year is the additional 20% not the full 40%. Is that right? Still probably doesn't make sense though, but would make sense if you needed to pay off eg a credit card debt.

@GunboatDiplomacy
Oh good point. Yes I always earn- so would always pay 20%, so the calculation would be

Spending 200 to save 30 quid on each 1k?

As you say, still not a smart thing to do, but good to know what the actual cost of taking it out would be.

Thank you

@TeenDivided - you're right. I think this is the point @GunboatDiplomacy just explained.

Thank you again. I have been puzzling over this for days and Mumsnet answered in minutes. ❤️

If you are a shareholder in your own limited company, dividend tax is as below - taking into account any income you have taken as salary.

Tax band - Tax rate on dividends over the allowance
Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%

I would change accountant OP, they should be able to explain that in super clear language to make things easy.

There is a difference between having cash in the business bank account and the profit made by the business. The Ltd company will pay corporation tax on the profits made each year, and that rate of tax is lower than personal income tax. You need an accountant to look at your personal financial circumstances, and find the most tax-efficient way for you and your business. Tax avoidance is legal.

If your accountant isn't particularly helpful, then get a different one. Some are much better than others, and charge similar.

Your accountant should be advising you on this, so I would really recommend getting yourself a new accountant if you can't talk to yours. They should be pro-active on tax saving advice, and advising you what to do.

Also, usually it is worth paying accountancy fees in order to save tax, and some clients don't recognise that as they don't look at the bigger picture.

I say this as an accountant (not touting for business as I stay away from Ltd Co accounts). My clients are encouraged to ask questions and to understand exactly what is going on with their money /business.

Thank you @Sawaranga @Parker231 @shardash

I think perhaps I should change accountants but I am nervous to. Because I worry that the fault is mine for not understanding properly or holding what they say in my head. Also I am not an ideal client as I often lose receipts and sometimes am late sharing my monthly bookkeeping ...

I’m in exactly your position OP, and no, don’t take out the money. You’d be paying the government a hefty chunk of additional money for no real benefit to you. You’ll have already paid the tax on it once (as profit) so keep it in your account for a rainy day.

Nope, they should make sure that you understand things and if you don't they need to explain it until you do. Honestly, I would go and speak to a few new folk and get a quote. Saves a lot of time in the long run. This stuff is difficult, that's why they exist!

It’s the accountant’s job to explain it clearly to you, so it isn’t you - it’s them.

I really don’t think most of these responses are grasping the issue properly. It’s really not as simple as spending £200 to save £30 on £1,000 income.

If I were advising you, I would ask you:

• When are you expecting this lean year, in basic rate tax? Because that £200 income tax is a one off cost, and the £30 interest is every year. If the lean year doesn’t materialise, you’ll pay the £30 p.a. and then the £200 tax eventually anyway.
• What interest can you earn on your example £1,000 in your business bank account? That interest income (after corporation tax) offsets the £30 annual interest due on your mortgage.
• Are you paying yourself via dividends? If not, why not?
• Are you interested in paying more into your pension instead? This is less likely to come with adverse tax impacts.
• How much of a lump sum are you talking about?

Without full information, you certainly shouldn’t rush to take the cash out, but it’s not an easy question to answer.

Don't look at me, I only did the maths!

@MyAnacondaMight thank you.

The lean year - hopefully never, but covid scared me - there was a long stretch where I only invoice for 3 or 4k a month.

I also worry about if I get sick as I'm a single mum and I don't have parents etc. I don't have a backstop beyond myself.

Also someone said if I left it in the business until I stopped working or slowed down a lot (definitely 10 years away, maybe 20 - who knows) I could pay myself then out until the business bank account is empty,

You could pay it to yourself but instead of using it to pay mortgage down, pay it (tax free) straight into a pension.

@MyAnacondaMight I just looked at my business account - starling. I don't think I am getting any interest at all.
I have about 50k in there now (mostly saving for tax etc) but I will have about 50 more in their by spring which effectively will be mine.

I am with starling, which I like and would be nervous to change. How much material difference is it to have interest? (In plain non mathsy language please)

@teendevided . Yes, because I think that is a way to get it out of the company tax free?
And is it true that I could then liquidate that at 57 if I wanted?

I'm not paying into a pension right now- my plan is to learn how to get my business and home as financially efficient as possible, then move to that project. I need to pace it else I drown in admin!