Wealth Matters have been running a number of Contractor Seminars this year. When it comes to investing, quite a few questions have kept repeating themselves among the 250 strong contractors in the audience. In the following article, we shall try and answer these questions to a wider contractor audience.

Wealth Matters have been running a number of Contractor Seminars this year. When it comes to investing, quite a few questions have kept repeating themselves among the 250 strong contractors in the audience. In the following article, we shall try and answer these questions to a wider contractor audience.Should I get my Limited Company to invest it’s spare money?

With bank deposit rates paying such derisory interest rates at the moment, many contractors are looking for a better rate of return for the cash sitting in their business. As a rule we would suggest that most contractors increase cash in their business account from three months expenditure to six, due to the volatile job market. So should this short term money be invested, into a potentially rising stock market? We would argue against this. Although your company can invest in a Unit Trust in it’s own name, tax and liquidity reasons usually make this bad advice. Firstly, any investment should be viewed as long term i.e. a minimum of five years. If you need money quickly or for your end of year tax bill, this is a non-starter.

Your company cannot own it’s own ISA or Self Invested Personal Pension (SIPP), so it cannot take advantage of these tax efficient investment wrappers. Furthermore, if your company Unit Trust did have an impressive growth rate, you could be deferring a much larger tax bill down the line. Eventually, you may want to access this money. In order to get the money out of your business, you are either going to have to take a salary or dividend or close the business down. All of these scenarios will create a tax charge. It is usually best to invest into your pension or ISA initially (the pension investment should reduce your Corporation Tax bill if set up correctly) and then your investment can grow within a tax efficient wrapper. Both these tax wrappers also allow you to avoid or minimise tax on the income when you withdraw the money to create an income.

In limited cases, where cash is going to sit idle for many years, there may be a case for the company making an investment. Even here, care should be taken; if too much of a company’s cash is invested, the Revenue may view the organisation as an investment company rather than a limited company for a contractor. However the legislation is somewhat vague and open to interpretation.

A “typical” contractor

We all know that there is no such thing as a typical contractor. The nature of the occupation makes a lot of contractors individualists and determined to pursue their own goals rather than follow a corporate agenda. However, let us assume that Mr Contractor lives in the Thames Valley and bills out at about £100,000 per annum. He runs his own limited company with 100% share ownership. It has very few business expenses, say £5,000 per annum. He draws out £35,000 in salary and dividends per annum, to cover personal expenses, mortgage, holidays, etc. He is accumulating around £40,000 per annum in their business after tax, sitting in the cash account. It may well be wise for the contractor to draw a further dividend of £5,000 to part fund their ISA. This gets this money into the tax efficient ISA and still keep then in the lower rate tax band. He could then start making regular or lump sum company pension contributions to help him achieve his retirement goal and this would help him to make large reductions in his Corporation Tax bill.

Get tailored advice

The scenario above is quite simplified and having spoken to hundreds of contractors, it is definitely fair comment that every individual contractor’s financial position is totally unique. Furthermore, their family and personal circumstances will affect their needs. The right answer for one contractor, may be entirely inappropriate for the next. The most important thing to do, is to obtain advice from someone that truly understands that tax issues and demands that affect contractors.