business savings accounts and higher rate tax

FFHillbilly

Ltd company sole director, £12.5k payroll, and approx £30k dividend/year
also, I have some properties which will generate £20k profit/year

1st year I've made this much so have never had to go into the higher tax bracket, I'm still not really sure how and when I pay higher rate tax, is it on the dividend (from 8.75% to 33.75%) or is it on the property income (20% to 40%)?

I asked my accountant and he didn't really explain it very well, but did suggest keeping money in the business to reduce the overall dividend to avoid going into the higher rate tax bracket. best easy access rate I can see is the Aldermore 3.05%, which is approx 30% less than I would get from my Chip easy access at around 4.5%.

so is it really worth leaving say £10k in a business saver and losing 30% of the interest, just to stop having to pay higher rate tax which is either a 20% jump or a 25% jump depending on how they work it out?
I'm working this out as I'm writing the post , but looking like I'd lose £150 worth of interest, but save £2500 on tax so it looks to be a winner for tax avoidance purposes, if you ignore the fact that it's still stuck in the business and I'll have to pay tax eventually to get it out

Dazed_and_C0nfused

Once your Personal Allowance has been used, usually but always on the earnings, then income is taxed in the following order,

Non savings non dividend (earnings, self employment profits, pension, rental profit etc)

Then savings income

And finally dividends.

FFHillbilly

well thats more help than my accountant gave me thanks, so at least I know I'll be facing a 25% jump on dividend tax.
so if I keep £10K in a 3% business saver i'll lose £150 in interest (compared to 4.5% personal savings) over the year, but will stand to gain £2500 in tax savings. (8.75% of 10K is £875 and 33.75% of 10K is £3375, £2500 difference)
so thats  a £2350 gain, am I working this out right?

tightauldgit

Bit more complicated because you'll still have to get it out of the business and pay tax on it eventually. Are you expecting to fall back into the lower tax band at some point? Otherwise you're only really delaying the inevitable. 

Also if you pay tax on the bank interest you'd have to factor that in too. 

billy2shots

Do you need all of the £30k divi?

Have you git a Sipp already?

If not then you can make ltd company contributions to the Sipp which are all tax free as they are a business expense. 

Do just enough to get you back into basic rate tax territory. 
If you have kids then this is even more important or you could have to repay x amount of child benefit. 

FFHillbilly

billy2shots said:

Do you need all of the £30k divi?

Have you git a Sipp already?

If not then you can make ltd company contributions to the Sipp which are all tax free as they are a business expense. 

Do just enough to get you back into basic rate tax territory. 
If you have kids then this is even more important or you could have to repay x amount of child benefit. 

thanks, I do need most of the dividends at the minute as it's all going towards clearing the mortgages as soon as the low rate fixed deals expire
However I have done some rough Calcs and after my 12.5k payroll, probably in the region of 18k profit from the rentals this year as there have been a few improvements, I have definitely decided to stop taking money out of the ltd co account as I have already probably taken more than I should have done to stay under the 50k threshold, and I will set up a business saver with Shawbrook at 3.15% and just keep the money in there for now

I don't have a SIPP, I had to google it to see what you were on about.
In 2019 I looked into a personal pension as I already had 2 rental properties and was unsure about buying more as I didn't want to have all my eggs in one basket, but after a visit from a financial advisor and checking his numbers afterwards it seemed more rental properties were a much, much better option so I bought another 2 in subsequent years. 
from what he told me in the initial consultation, a private pension is just paying for a service, I pay the fund manager to look after my money and hope for the best, so I thought why don't I just invest it myself in more rental properties?
I've had the pension discussion with friends of a similar age a few times, they are all employed and boast about how much they put in and how much they get from their employer, in that respect pensions seem great, but to me as a sole director of a ltd company they don't seem great at all and I can make much more elsewhere so i have yet to bother with them. 
If I'm missing something, please let me know. 
I am probably going to take an employed position within the next 5 years anyway

FFHillbilly

update on this as my accounts have just been drawn up, my salary from my company was 12.5K , property income £18k, savings interest £1500, I kept 10k in a business savings account last year and only took out 18k thinking that was the most I could take out without going into higher rate tax.
on my accounts the dividend for this year has been set to 15k..? I don't really know how they work this out, I have explained that I have taken out more than that, but the response I got was just a load of account speak gibberish about directors loans and maximising tax savings last year which really makes no sense. I then decided to look at the last 5 years accounts and bank statements and discovered that the amount I withdraw periodically throughout the year which is not business related (which is what I would class as dividends) has never really been close to the actuality declared dividend amount for that year. over that last 5 years the difference between what I have withdrawn and the final dividend was (in thousands) 3, 11, -6, 9 and 4
I do wonder if this is perfectly normal practice, but am definitely concerned by my accountant lack of ability to explain this to me. the reason I want to know is  I would just like to know how it works, and how I can use this information next year to maximise my my own tax savings next year