The Fizz! Blog

Company owner wanting to get a mortgage? Plan ahead

Getting a mortgage has always been slightly more hassle for company director/shareholders than for the employed or self-employed.  An employed person's income is easily assessed from payslips and P60s, a self-employed person's from their accounts and tax return.  A mix of salary and dividend is harder for a mortgage adviser to assess and understand - but you can generally get to a department within a lender who understood and dealt with such applications.

Historically, many or most lenders, when considering a mortgage application from a company director/shareholder, would take into account a) salary, b) dividends taken and c) profit that could have been drawn as a dividend but wasn't (retained profit).

It seems now that most lenders will only take into account a) and b) and ignore retained profit.  We're reliably informed that there are now only three lenders who will take into account retained profit as well.

Many company owners don't take anything like the dividends they could, as they want to (prudently and legally) shelter income from higher-rate tax.  However, if you do that and will be looking to get a mortgage in the next few years, you might want to at least think twice about that policy.  Your favoured lender (and maybe, in a year or two, *all* lenders) might only take into account dividends that actually *have* been taken, as opposed to dividends that *could have* been taken but weren't.  You could consider biting the bullet and starting to pay yourself higher dividends to make yourself "mortgage ready" and able to borrow more in future.  You may have to demonstrate two years of earnings to the lender, so plan ahead.  It would be frustrating to be assessed on income of £40,000 when you could have been assessed on something much higher, and could easily service the debt.

This may not apply in your circumstances, but it could be really important for some people.  Talk to a good mortgage broker if you think it could be an issue for you - we're very happy to recommend someone if you don't have an adviser on hand.

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Could a Childcare Voucher scheme work for your business?

Childcare Vouchers are a pretty decent perk that employers can provide to their employees.  They effectively enable a company to pay for a certain amount of childcare for an employee, without any need for the employee to pay tax on that amount.  Most employees can receive up to £55 a week of vouchers, tax-free - that's £2,860 a year, tax-free, which isn't bad.

The scheme can be used even if you're the director of your own company and have no other employees.

This is a pretty good resource for further reading.

A few points to bear in mind.

1. You do actually have to be paying a registered child carer or nursery for care.  You can't just take the money and keep it, or give it to a (non-registered) family member!
2. This may seem obvious, but it's the biggest single reason that tax planning strategies fail - you need to actually do it properly.  Some people think it's OK if they just get their company to pay for all their childcare costs, and if HMRC have a look at the arrangement it'll probably be OK.  It won't. You need to have everything in place and done correctly.  If that seems too much hassle, then tax-efficient childcare is not for you, unfortunately!
3. You can't use the scheme for your own childcare costs if you're a sole trader or partner.
4. You have to make the scheme available to all employees (broadly speaking).
5. It's possible that receipt of vouchers could have a negative impact on receipt of state benefits - specifically the childcare element of Working Tax Credits.  So look out.  There's a calculator which may help here.

If you'd like to explore this further, get in touch.

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Junior ISAs start tomorrow

Junior ISAs become available tomorrow.  To be honest, it's probably not going to be enormously exciting to many people.  The reason that most people don't save enough for their children's futures doesn't really have a lot to do with whether any interest will be taxable or not - it's more usually to do with them either a) not having enough cash or b) preferring to use the cash for short-term gratification rather than long-term planning.  And, even for those who do save for their kids' university education or whatever, the idea of handing the whole balance over to their child on their 18th birthday may seem a bit risky, to say the least.  So at the moment Junior ISAs look like a bit of a gimmick.  At the moment there's only a couple of providers offering them in any case, so it'll be a while before it's possible to really say if there's been an enthusiastic take up.

For people who are more interested in saving money for a child but who don't want them to be able to blow the lot when they're 18, a stakeholder pension for the child could be a more tempting option.

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Compulsory staff pensions from 2012

From 2012, employers will be obliged to pay into a personal pension on behalf of their employees, and the employee will be obliged to contribute as well.  Although there had been some speculation that small employers might be exempted, the government has decided that won't be the case. 

Although I'm not sure I agree with the scheme as a whole - instinctively I'd rather state interference in people's choices was limited to just what's absolutely necessary - I think it's quite right not to exempt small employers.  For donkey's years everyone in the business community has been asking for simplification of the rules for businesses, and for donkey's years the government has been responding by making the rules more complicated.  So the move over the last few months towards simplification is very welcome.  If this system's going to come in, far better for there to be no doubt about which employers have to do it and which don't.

If you are taking on employees, then you are taking on responsibility for treating them professionally, like it or not, and it isn't fair for the employees of small companies to be treated less well than those of bigger employers.  If you're not willing to accept the responsibilities of an employer, then you don't have to be one.  Business isn't for everyone.  Let's keep the pension rules as simple as possible.

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ISA allowance to increase - plan ahead

From 6 April 2011, the ISA allowance increases to £10,680 a year, from £10,200 at present.  Of that, half - £5,340 - can be saved in a cash ISA.

Where clients want to save in an ISA, we often advocate setting up a regular monthly payment system.  It's a lot easier to find one twelfth of your target each month than it is to find the lot in one go at the end of March.  We practice what we preach - I have monthly standing orders set up of £425 to a cash ISA and another £425 to a stocks and shares ISA.  Come the end of the tax year, I'll have used my allowances exactly, without missing the money - well, without missing it too much, anyway!  I've just made a diary note to increase those amounts from next April, and if you use a similar system you might want to make a note too.

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Start thinking about your personal tax return

While we're on the subject of tax-year-driven deadlines, you might want to start thinking about your personal tax return for the tax year just ended - the year to 5 April 2010.  The actual deadlines for submitting the return are 31 October 2010 (if you're submitting it on paper) or 31 January (if you're submitting online - which is the case if we prepare your tax return for you).  Obviously very few people have yet submitted their return (except for Jane and my Dad) but there's no reason to leave things until the last minute.  In fact, there may well be benefits for getting it in early.

For example, if you've tax to pay, the sooner you know the amount the better - it's much better to know the amount now than at the last minute, especially if you don't have the cash immediately to hand.  If you normally make payments on account of tax in January and July, then getting your return done before the end of July may enable you to reduce your July payment, and get some of your January payment back.  And in any case it's easier to collate or pass on the bits and pieces of paperwork now as they arrive from banks and the like, rather than trying to dig them all out in the New Year.

And if you're due a refund, the sooner you get your return in, the sooner you'll get your money back!

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Why can't the ISA season be 12 months long?

March is often described as the "ISA season" by Financial Advisers, as people get round to using their annual tax-free ISA allowance.

But why do we all leave it until the last minute? Saving for the future is important, and it's not the best policy to cross your fingers and hope you'll have enough money left at the end of the year to put something away. Imagine if March was "mortgage season", and we paid nothing off our mortgages all year and then frantically tried to scratch together enough money to make 12 months' repayments in one go. It'd be absurd.

If, for example, you're planning to max out a cash ISA this year (£5,100 in all), why not consider setting up a standing order for £425 a month? That way, the ISA will be fully funded by the year-end, and you won't have to leave things to chance at the last minute.

If you're not sure how (or whether) you should be using your ISA allowance then you should speak to a Financial Adviser - we can put you in touch with one we trust if you don't have a relationship with one at present. But do think about having a strategy for funding your savings - don't just cross your fingers and hope for the best.

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