Feel Like a fraud

FinancialFreedom38

Hi,
I feel like a bit of a fraud on here because I do potentially have the means to pay off my debt, have just been careless with my cash this last year.
I was close to financial ruin twice in 2009 after a long period of unemployment - I got a 'get out of jail card' just in time and have been contracting for a year now. I earn a really good day rate and even though I haven't run up any new debt for a year now, after the annus horribilis that was 2009 and a major bereavement at the beginning of 2010 - I spent and 'treated' myself to the max. I've now stopped all of this crazy spending, but have no savings cushion and owe £10k in debt. I've had an idea, but I'm a bit scared about it. The thing is, I can withdraw a huge chunk from my company bank account and use it to clear my debt. This means £10k interest free and no creditors except myself. What to do?
Reasons for being scared are, a) I'll have to pay it all back within a year, b) I'm a year in to a 3 month rolling contract - this plan only works if I stay employed at my current day rate or higher.
I won't run up any new debt - have proved I can do that this past year - but I'm scared to take the risk .... please advise someone .... what would you do? Thanks

Tixy

Hi - thats a tough question and depends a lot on your circumstances.

By company account do you mean a Limited Company? Are you the sole director and sole shareholder? Do you usually pay yourself from your company by payroll or dividends (or both).
Do you have a directors loan account in the company? debit or credit?
Are there sufficent reserves in your company that you could declare an additional dividend? Does the company havedebt (eg to the bank) and if so have you given personal guarantees against the debt?

Are you thinking to loan the money to yourself and then pay it back within the year to save yourself being taxed on it? or because your business will need the funds in a year.

The personal debts you have at the moment - what APRs are you paying? can you afford to repay them all off in a year anyway? Have you tried moving any of it to lower APRs - eg if you have cards then have you tried applying for 0% deals etc.

climbgirl

Just a question for clarity - are you talking about your own company bank account (i.e. you are self-employed) or a company who you work for?

Clearly if it's the latter, you shouldn't even think about that kind of thing.

If it's the former (you are self-employed and it's your company), I'd be very wary of mixing your company finances with your personal ones. Sounds like your company is doing well, why would you jeopardise this?

If it is your own company, can you not pay yourself a higher salary or pay yourself dividends to try and clear your debts?

FinancialFreedom38

Hiya,
Thanks for coming back to me. Yes, I'm sole Director of a Limited company. Was thinking of taking £5k as a Directors loan and £5k of extra dividend, all of which would have to be paid back within the financial year. I could potentially get away with not paying back the dividend, but I would be taxed 25% on it and would also like to keep any spare dividend that I can just in case I'm out of work (no savings cushion at the moment).
After being out of work for most of 2009, having high debt at that time, and not yet being self employed for a year, I can't currently get any extra credit and credit cards either turn me down or offer me really low credit limits. I paid £2,500 off my MBNA card last year and they used that as an opportunity to reduce my credit limit! I don't think 0% offers are an option for me to be honest - plus I've done the rounds of all of them at least once over the past 10 years.
I'm paying about £120 per month in interest at the moment - yes, I could just pay them off, but the directors loan option seemed appealing as it's a 'quick fix' and it saves me interest. Maybe I can take smaller directors loans, and pay off one debt at a time ..... making sure I clear the previous Directors loan before I pay off the next debt. With my first idea, it requires that I pay off the loan at £1,000 per month realistically - it doesn't leave me much room to maneouvre ... what do you think? Thanks again

FinancialFreedom38

climbgirl wrote: »

Just a question for clarity - are you talking about your own company bank account (i.e. you are self-employed) or a company who you work for?

Clearly if it's the latter, you shouldn't even think about that kind of thing.

If it's the former (you are self-employed and it's your company), I'd be very wary of mixing your company finances with your personal ones. Sounds like your company is doing well, why would you jeopardise this?

If it is your own company, can you not pay yourself a higher salary or pay yourself dividends to try and clear your debts?

Hi, yes, was thinking of taking extra dividends from my Limited company .... then repaying myself to avoid extra tax on the dividend and interest on the debt ...

tangyfog

the 10k is that profit or is that money in business account set aside for paiding VAT and Corporation tax.

I have a similar situation as you and I would ask you accountant when your Corporation tax is due. as this will be significant approx 21% of your day rate. You need this money readily availabe to pay vat and corp tax. I just paid mine and it was alot.

Also think about holding off and service the debt until your have more funds at hand. you need cash flow and reserves by paying off debt you reduced your available cash use.

FinancialFreedom38

tangyfog wrote: »

the 10k is that profit or is that money in business account set aside for paiding VAT and Corporation tax.

I have a similar situation as you and I would ask you accountant when your Corporation tax is due. as this will be significant approx 21% of your day rate. You need this money readily availabe to pay vat and corp tax. I just paid mine and it was alot.

Also think about holding off and service the debt until your have more funds at hand. you need cash flow and reserves by paying off debt you reduced your available cash use.

Yes, I totally agree with your last point - I've never appreciated so much the value of cashflow until 2009, when I had none ..... makes me nervous about not having cash to hand. I will speak to my Accountant and build up a bit of cash reserve too - servicing the debt isn't a problem at the moment, maybe I just need to be a bit more patient!!

BaskB

Doing what your looking at is exactly what I did myself to pay off my debts, using a 0% loan to pay of Credit cards with higher rates makes perfect sense aslong as you make sure you can pay it back before your accounting period end date you'll be fine.

Accounting periods for existing businesses

The date on which the financial year ends, called the accounting date or accounting reference date, is normally 12 months after the previous accounting date. Your business can use a date seven days either side of this date if this is more convenient.
Accounting periods for new businesses

For new companies or LLPs the accounting period starts on the day of incorporation, not the first day of trading, and ends 12 months later on the last day of the month in which the business was formed (or seven days either side of this if this is more convenient).
If a company was incorporated on 10 June 2008 its accounting date would be set at 30 June, and the first accounts would cover a period from 10 June 2008 to 30 June 2009 - or up to seven days either side of that date if this is more convenient.

Your personal tax year will obviously still follow the same April to April pattern as everybody else.

You havent also stated if your the only director in this company, if your not you'll need permission from others to make any directors loan.

One last thing am not sure if you accountant has advised you this, but its LEGAL to make a dividend payment at anytime from the company accounts to yourself as long as its only from profit made. One accountancy company offer a free bookkeeping spreadsheet, with that it actually breaks down your invoices into Corp Tax, VAT (if applicable) and removes all expenses etc, then shows how much is left in the account free for dividends each month or whenever you wish to take it.

FinancialFreedom38

BaskB wrote: »

Doing what your looking at is exactly what I did myself to pay off my debts, using a 0% loan to pay of Credit cards with higher rates makes perfect sense aslong as you make sure you can pay it back before your accounting period end date you'll be fine.

Accounting periods for existing businesses

The date on which the financial year ends, called the accounting date or accounting reference date, is normally 12 months after the previous accounting date. Your business can use a date seven days either side of this date if this is more convenient.
Accounting periods for new businesses

For new companies or LLPs the accounting period starts on the day of incorporation, not the first day of trading, and ends 12 months later on the last day of the month in which the business was formed (or seven days either side of this if this is more convenient).
If a company was incorporated on 10 June 2008 its accounting date would be set at 30 June, and the first accounts would cover a period from 10 June 2008 to 30 June 2009 - or up to seven days either side of that date if this is more convenient.

Your personal tax year will obviously still follow the same April to April pattern as everybody else.

You havent also stated if your the only director in this company, if your not you'll need permission from others to make any directors loan.

One last thing am not sure if you accountant has advised you this, but its LEGAL to make a dividend payment at anytime from the company accounts to yourself as long as its only from profit made. One accountancy company offer a free bookkeeping spreadsheet, with that it actually breaks down your invoices into Corp Tax, VAT (if applicable) and removes all expenses etc, then shows how much is left in the account free for dividends each month or whenever you wish to take it.

Great, thanks, definite food for thought via all these responses. Yes, I am the sole Director, so no problem with getting permission. As I have no personal savings, I think I'll take the directors loan/ dividends in installments first, that will mean that I can save the money from repayments and interest and build up a bit of a personal cash reserve whilst ensuring that I can pay back each Directors loan/ additional dividend before I clear the next debt. I think taking £10k in a lump sum, in terms of my first plan is probably biting off more than I can chew at the moment - forcing myself to have to pay back around £1,000 per month for 12 months is too risky.
In terms of extra dividend from profit, yes, I can take it anytime, but I was under the impression that I would have to pay 25% tax on any monies taken if I don't pay it back .... is this your understanding ?