Do I pull out business savings?

[tony84]

I am a bit confused about what to do and just want to check my basic sums...

Lets say I have £10k in a business account (if we assume I have already paid corporation tax on it).

If I pull that out as a dividend, I get taxed at 8.75%.
If I then put it in an ISA and get say 4% in interest.

That means it has cost me £875 (8.75%). But I get £365 (4% on £9,125) back in interest meaning I end up with £9,490.

If I put the same money in a business savings account at 3% I get £300 which becomes £240 after corporation tax.
That then means in 12 months I have £10,240. That then incurs dividend tax at 8.75% assuming I withdraw it.
£10,000 + £300 (interest) - £60 corporation tax = £10,240. £10,240 * by 91.25% = £9,395.

So in the example above, I would be around £100 better off withdrawing the money?

Do I have that right?

 

[Daybooks]

Corporation tax is currently 19% therefore I wouldn’t agree totally with your numbers. However if you do the maths you should find that providing the same rates of corporation tax and dividend tax rates apply to the withdrawn amounts then equality is gained when the interest rates are the same. Which of course should tell you something. Obviously if the interest received via the withdrawn amounts were subjected to tax there is more to consider, as well as many other considerations.

 

[tony84]

I was just rounding it off at 20% for ease, but I take the point.
I think it is about £93 better off instead of £95 (or £100 I mentioned), but just wanted to clarify.

So in essence providing I do not go over the 40% tax threshold I am actually better pulling out everything and taking advantage of the increase in savings rates? I cant imagine income tax rates coming down anytime soon.

 

[Daybooks]

If as you say corporation tax has already been levied on a £12,345.68 to leave £10,000 for distribution then:
Of the £300 earned via the company you’ll keep (£300 - 57 - 21.26 ) £221.74 versus the £365 ISA.

You are going to have to pay to extract it at some point so it really boils down to the interest rates and how much of that you can keep. Remember it is the relevant prevailing tax rates when you extract or earn. The taxes interact so you may benefit from the dividend allowance or savings allowance therefore always best to look at all circumstances including income tax rates surrounding a particular choice.

 

[od3d]

Aren't there business accounts that offer a higher savings rates than 3%?
Is there a reason why private accounts get better rates? [Call me naive]

 

[Porky]

I think the key point is that ultimately you may want to get the cash out of the business and over to you personally.

If the business is sitting on lots of cash it needs to make that money work, perhaps consider business expansion or invest in other companies, look at other ways to make the cash work.

Based on your numbers I would agree that up to the divided limit would probably be an advantage - I’m sure HMRC will do something soon to steel a bit more from you and the business soon.

Meanwhile interest rates are probably looking to go higher and with the collapse of SV Bank on Friday that could cause a ripple effect and see more cash going into gold. Mad times

Good luck

 

[DontAsk]

Do you need the cash? If not, have you considered using some of it for pension contributions?

 

[tony84]

@od3d Business savings accounts are not as much, but then they also get taxed I think. I think it is to do with the cost of setting them up for the bank.

@Porky I have no preference where the money is at the moment. I am just thinking that ultimately it will get taxed when it comes out so now might be the best time with interest rates being as good as they have been in a while. I can also pull some out this tax year and next so need to decide what to do in the next fortnight.

@DontAsk I dont need the cash. But it was built up in the run up to brexit (I was not sure if the mortgage world would go on its head), we also now have a recession on the horizon so its there to cover a quiet period which may mean I need to dip into it over the coming year or 2. I also dont want to put money into a pension as I prefer the idea of being able to get it when I need it. I would put some in a S&S ISA instead I think.