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?

50k at 5% would give you an extra £2500 across a year pre tax.

Or your company can make employer contributions directly which is a company expense so reduces corporation tax, which may be better now corporation tax rates have increased.

@organicbox

Alright, let's break it down. In this scenario, you're deciding between leaving the money in your business account to potentially use during lean years or paying off a chunk of your 5 percent mortgage by paying the 40 percent tax.

Option A: Leave the money in the business

Pros:
Provides a financial safety net for lean years in your business.
Money remains accessible for business-related expenses.

Cons:
The money isn't actively working to reduce debt or earn interest.

Option B: Pay off a chunk of the mortgage by paying 40 percent tax

Pros:
Reduces mortgage debt, potentially saving on interest payments over the long term. Immediate impact on your overall personal debt.

Cons:
Incurs a 40 percent tax, which is a substantial upfront cost.
To decide between the two options, you could calculate the potential long-term savings from paying off a chunk of your 5 percent mortgage versus the short-term benefits of keeping the money in the business.

For example, consider the interest you would save on the mortgage over the remaining term compared to the potential tax savings and financial flexibility of leaving the money in the business. It might be helpful to consult with a financial advisor or use online financial calculators to estimate the long-term impact of each option.

Sorry @TeenDivided what does this mean?

If I did what with 50k?
I don't quite understand

Thank you @Chromium24 - do you know how to calculate it? If I have a 23 year 5% mortgage, what would I save if I paid 50k now and then continued the mortgage for say, 10 years? Or for 20?

I have no idea how to know this...

@Chasingsquirrels hopefully this is correct if its wrong ill try different method for you :

Assuming a fixed-rate mortgage, here's a simplified way to estimate the potential savings:

1. *Calculate Remaining Balance after the Lump Sum Payment:*

- Deduct the $50,000 lump sum from the remaining mortgage balance. This gives you the new balance.

1. *Calculate Remaining Monthly Payments:*

- Determine the remaining number of monthly payments based on the remaining term of the mortgage.

1. *Calculate Interest Paid Without Lump Sum:*

- Using the original interest rate, calculate the total interest paid over the remaining term without the lump sum payment.

1. *Calculate Interest Paid With Lump Sum:*

- Using the new remaining balance and the original interest rate, calculate the total interest paid over the remaining term with the lump sum payment.

1. *Calculate Savings:*

- Subtract the total interest paid with the lump sum payment from the total interest paid without the lump sum payment. This difference represents your potential savings.

Let's illustrate this with an example. Suppose you have a $200,000 mortgage with a 5% interest rate and a 23-year term. You've paid it for 13 years, and now you want to pay $50,000 and continue the mortgage for an additional 10 years.

1. *Calculate Remaining Balance after Lump Sum:*

- Initial Mortgage: $200,000 - Lump Sum Payment: $50,000 - Remaining Balance: $200,000 - $50,000 = $150,000

1. *Calculate Remaining Monthly Payments:*

- Original Term: 23 years - Paid for: 13 years - Remaining Term: 23 - 13 = 10 years

1. *Calculate Interest Paid Without Lump Sum:*

- Using the original mortgage details and the remaining term of 10 years, calculate the total interest paid without the lump sum.

1. *Calculate Interest Paid With Lump Sum:*

- Using the new remaining balance ($150,000) and the original interest rate, calculate the total interest paid over the remaining 10 years with the lump sum.

1. *Calculate Savings:*

- Subtract the total interest with the lump sum from the total interest without the lump sum. This gives you the potential savings.

This may also help @organicbox

If you have a 23-year mortgage with a 5% interest rate, and you pay $50,000 now, you will reduce your principal balance by $50,000. Assuming you continue to make payments for the remaining 10 years, you will save on the interest you would have paid on that $50,000 over the next 10 years.

To calculate the exact amount you would save, we need to know the monthly payment you are currently making. Assuming you are paying $1,000 per month, you would save approximately $18,000 in interest over the next 10 years. This is a rough estimate, and the actual amount you would save depends on the exact terms of your mortgage and the interest rate you are paying

But it’s £20/£40 a year interest saved for every year remaining on your mortgage…not a one-off. So not quite that simple

First of all you need to get yourself a much better accountant who can structure your accounts in a tax efficient way. As part of that you need to pay into a pension, if you have £50k in your account you really should have enough to pay into a pension even if you start small, something is so much better than nothing. It’s tax efficient and the sensible thing to do.

A good accountant will also explain all this to you and if you feel awkward asking then they aren’t the person for you.

in my business I take what I need on a monthly basis and then also take a lump sum as and when it builds up or I have a big personal purchase/investment. My accountant then structures my accounts at the end of the year between dividends and personal income so that I pay the least tax possible.

Given it seems the money will otherwise sit in your bank account earning nothing for years, it’s your money so you should be able to use it to pay down your mortgage and make your life more secure safe in the knowledge your accountant will sort it all out later. Yes you’ll pay tax on it but it’s your money and if you don’t/can’t use it for years what’s the point in earning it.

Also overpaying your mortgage saves you thousands and thousands in interest, see money saving expert for a calculator. For example if you took 50k from the business and paid that off a £200k mortgage with 10 years left at 5% - you’d save over £40k in interest alone. This massively outweighs the £20k extra tax you pay on that lump sum.

If you've got excel there are loan interest calculators under templates which you may find useful. You just need to know the outstanding balance, term and interest rate.

Regarding the bank interest - you could leave whatever you need in Starling to cover working capital, and transfer the remainder into a new account that pays better interest. I did a quick google, and Starling do offer a business savings account but they only pay 2.5% on a 1 year fixed term deposit.

I would recommend speaking to your accountant though about this because they will be better placed to offer advise on tax planning, pension contributions and exit strategy as they will know your full circumstances much better. They will probably charge you for specific advise, as they also have a business to run, so I don't think that's unreasonable. Although, I would expect general advice to be given at least as part of the package you are paying for since it sounds like they are also doing your monthly bookkeeping?

Are you actually self employed OP? ie you are a sole trader. My understanding is that you pay tax on the taxable profits that you earn in the tax year. It is irrelevant if you spend the money or not even if it is in a separate business account ie Joan Smith t/a my business. Therefore it doesn’t matter when you take the money out of your account (as long as you leave enough to cover all of your liabilities including your tax bill). Therefore you should take the money out to pay your mortgage.

This doesn’t apply if you have actually set up a company registered with Companies House. In this instance you and your company are two separate entities and you should get some tax advice.

@OldLabMummy she's a director of a limited company.

@Fallenangelofthenorth Sorry I missed that, despite reading all of the OP’s posts before I posted. Must still be half asleep.

@OldLabMummy it wasn't in the OP, it was in a subsequent post. I was thinking the same as you before I read it.

If you pay off some of your mortgage you are saving the interest rate each year. Eg. If you pay £600 of capital you save £30 each year that you have left on your mortgage. More if interest rates rise.

There are online calculators showing the impact of making overpayments. Double check you can overpay without penalty plus for maximum benefit you need to keep your existing mortgage payments the same . Some mortgages automatically reduce the monthly amount after an early repayment which keeps the term the same.

Also if you take money out of the business, are you taking it as dividends or salary? The difference being what national insurance you pay.

Lastly have you checked if there are other costs you can legitimately put through the business? That reduces the tax liability of the business as a whole.

As pp said, you need an accountant that properly explains tax planning to you.

Pensions are an easy way to save for you future - they would grow more that the mortgage savings.

They are easy to set up - choose one of the big providers and make sure it’s held in trust.

Thank you all. This really is quite amazing.

I think my accountant does do some dividends and some salary - I have looked at it's separated like that in the end of year accounts. And yes, I didn't understand the difference between limited company and self employed but now I do, I am employed by my own limited company.

The explanations are so good, I wish I could print this thread out and go through it with a highlighter pen,

I am going to read it again several times, but my takeaways are:

) I need to look at changing to an accountant who is a better fit and a bit more available to explain things.

) there's a strong case for the company making pension contributions.

) however, if it's not horribly inefficient I would like to put the money into paying off the mortgage because this isn't where I want us to live forever, and if I pay off some mortgage, that would mean I have a bigger budget for buying the next place eventually.

) I need to ask my mortgage provider how much I can pay off without penalty. And I need to make sure they don't adjust my payments down if do pay off that amount.

) the money I save has to be calculated over however many years I have left. I have a lot of years left.

) the solution might be a bit of one and a bit of another. Not as satisfying as pulling out a chunk and seeing some numbers go down, but likely more sensible.

) it's not sensible to have large sums of money in an account with no interest. The idea of changing business accounts is a bit off putting - I find learning new functionality tricky, my dyscalculia means I am more prone to mistakes. and I have all my vat and tax pots set up inside it etc which makes me feel organised. BUT I will look into starling business saving accounts. Thank you for that tip. Does anyone happen to know what is a good amount of interest for a business saving account at the moment? Just so I can compare?

I will update on progress for anyone interested. I appreciate your time a lot. Thank you

Ps @Chromium24

I am screenshotting that process you wrote down and am going to try and go through it. It will take time to find out all the details, but will make sense of a lot of it I think. Thanks for taking the time.

To calculate how much you will save by overpaying your mortgage use this calculator: https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

It does it all for you.

your welcome, just hope it helps

Hello, just in case anyone is interested in an update, I took all your guidance about what to consider RE the surplus business profit and deciding where her to take them out of the company, pay high rate personal tax, and pay off some of my mortgage on my rental property, OR to leave them in the business, and to talked it all through with Financial Advisor.

He had a brilliant idea. He suggests that I let the savings grow inside the company until I get to about 50 K, which I think I will this financial year, and then sell my rental property to my company. My company will then be able to pay the mortgage on it as an expense and that money will not be liable to personal tax. So effectively getting the money out of my company, AND paying off my mortgage on my investment property

really interested to know if anyone has thoughts on this?

Thanks

Don’t do it! These company mortgages are a nightmare. When you sell your flat you will be liable for a shedload of tax.

@NottsNora
Thank you for that- what was nightmarish about the company mortgage?

And I don't think I'll ever sell it (it's meant to be a passive income when I am old) but if I do, what taxes would I be liable for?

Do you have experience? I'd love more detail if you have a min

Thanks

Have you got a SIPP? Thats the best way to get money out of the company tax free (actually tax beneficial)

That is a bonkers idea, if you lose the business for whatever reason you lose the house too. No matter how unlikely that is, or how much tax I would have to pay on my earnings, there is no way I’d put my house in even 1 iota of danger.