Overpaying mortgage versus higher tax bill - thoughts please

woolythoughts

Hi

Not sure if this is the right board or not.....

We're about to complete a house purchase with a 187500 mortgage initially on a 2.75% fix and can overpay 10% each year in the first two years

Initially the plan was to overpay the 10% of the 187500 spread over 12 months - so an extra 1560 a month.

I am self employed in that I run my own limited company. Problem is, dependent on other outgoings, withdrawing enough to overpay the full 10% may push me over into higher rate tax which for many reasons I try to avoid.

DEspite being financially literate (accountant but not in practice anymore) I'm having a mental block on the following scenarios and trying to work out which is more efficient:

1. Withdraw 10K and overpay mortgage but incur 40% tax on the 10K i.e. having to withdraw 16K to be able to overpay the 10K

2. Not overpaying the 10K and incurring higher interest

If I can get my head around the calculation, I can obviously run it for what ever figures I end up having to work with.

I should be able to work it out but I'm having the official blonde moment.

lee111s

How much can you withdraw without facing the higher taxes?

woolythoughts

Hi

At this point I don't know - it will depend on monthly outgoings, what I get reimbursed by clients, etc etc

I'm using a figure of speech to try to work out how to do the calculation going forward.

Wooly

TrickyDicky101

Annualised interest on £10k at current rate is only £275 so you would be paying c.£6k to achieve that saving (assuming all at higher rate, please note).

Of course, you will presumably face some tax on any withdrawals whenever you do take the money dependent on your earnings at the time.

woolythoughts

THanks

I think I've clarified it in my head now:

I can over pay whatever we can up the higher rate threshold. And will be doing so.

Anything over than incurs an extra 20% charge (not 40% as I originally posted since 20% is accounted for by the dividend credit).

So for each extra 10K I would pay £2250 to save £275 per year - I can then pro rata that but effectively its not worth it as even overpaying a proportion of what we can we still pay it off in less than 10 years and it would require about 10 years of interest on the 10K to outweight the cost saving on the tax.

Not sure why I was making it so difficult!

getmore4less

The real issue is will you ever be able to withdraw the money without paying the tax?
ie. will you have lower profit generating years where you need the reserves to pay you.

Also what does the money earn staying invested in the business.