First up, I must apologise for going AWOL over the last couple of months.
I’ve been working hard on my income goals, had a few personal crises and have been frantically moving my money round in an effort to avoid becoming a higher-rate tax-payer.
I failed at the latter – there are only so many legitimate business expenditures and I was simply earning far more than I could realistically spend.
Business profits (and taxes)
There’s a couple of weeks to go in this fiscal year and it looks like my final end-of-year profits will be around the £60,000 mark – that’s a full £10K more than the £50,000 upper limit for basic rate tax-payers.
So, not only will I be paying a higher rate of tax on that top £10K (at a hefty 40%, that’s £4K of income tax), I’ll also have to pay back the child benefit that my partner has been receiving, which adds an extra £1,100 or so onto the total.
Incorporation is the way forward
I’ve had a few Zoom meetings with my accountant and we’ve decided that the best way forward would be to incorporate part of my business – I am going to become the Director of my own company!)
It’s not what I would have ideally wanted – extra admin and regulation – but it will certainly help me out with my tax bill in future.
This is because as a sole trader I typically pay 20% tax on earnings between £12.5K and £50K and 40% above £50K (below £12.5K is my personal allowance that I do not pay tax on). In addition, it is about 9% for National Insurance (2% over £50K), so around 29% in total at the basic rate and 42% at the higher rate.
However, as a limited company, the company would pay a flat 20% Corporation Tax on profits. Then, I can take a Director’s salary (which would be tax-free because it would be a low amount that falls within my personal allowance) and the rest can be taken as dividends, taxed at 7.5%. If I am earning too much – like what happened this year – I won’t be personally taxed on any excess because it will stay within the company.
Premium Bonds (the home of my tax money)
During the period of time after I receive revenue in my business but before I have to pay my tax, I have a crapload of cash sitting around that is owed to HMRC.
Previously, I’ve kept it in a high-interest instant-access savings account to make a bit of money on it before I get my tax bill. Unfortunately, there doesn’t seem to be such a thing as high-interest savings these days with current top interest rates at around 0.4%! So, this year, I’ve decided to give Premium Bonds a try (review coming soon!)
Premium Bonds are pretty much a lottery. Instead of paying interest to everyone, they give cash ‘prizes’ to lucky winners that have their numbers called each month. And, best of all, the prizes are tax-free. I currently have about £16K invested in Premium Bonds but have so far won nothing, however, I’ve only been in one prize draw thus far.
At the end of the year, I hope to have earned more in prizes than I would have in a savings account -and I hope to report a decent win soon!
Current NET worth
At the beginning of April last year (2020) I had personal assets (savings and investments) totalling about £15K.
This year, it is around the £28K mark.
Every year, I rebalance my portfolio to ensure that I have the right risk exposure – I try to have around 50% of my portfolio in low-risk cash savings and the other 50% in higher-risk investments.
In reality, it’s usually more like 55%-60% in cash and 40%-45% in investments. I had a little extra cash because it would provide me with a bit more of a cushion if my business went tits-up. However, now I have a larger cache of savings (over 6 months emergency fund), I’ve decided to put the surplus in my investments instead. Also contributing to this decision is the current poor interest rates available. My investment of choice my Vanguard ISA.
With regards to savings, my First Direct Regular Saver has matured and I’ve taken my cash out. I won’t be opening another one this year, as it has dropped to 1% interest rate. With no regular saver, I have closed my First Direct 1st Account as the Regular Saver was the only reason I kept it open.
My Club Lloyds Account currently pays 0.6% on balances up to £4000 and then 1.5% on balances between £4000 and £5000, which is better than a lot of instant access savings accounts. So, I’ve decided to keep a balance of around £5000 in my current account.
Any remainder will be stored in my Marcus Savings account, whilst I await a better opportunity to utilise it. It only pays 0.4%, which is sad but even sadder is that is still one of the best instant access savings accounts on the market.
The Club Lloyds account also provides access to the Lloyds Monthly (Regular) Saver, which will be 1% this year. It matures in a couple of weeks and I will be opening a new one.
Why keep the Lloyds but ditch the First Direct when they both pay 1%? Firstly the Lloyds Monthly Saver is part of my regular banking – the First Direct Current Account only exists to facilitate the regular saver. It’s just one more bank account for me to worry about, so I’m happy to lose it for the sake of simplicity. Secondly, the First Direct only allows a maximum of £300 to be deposited each month, whilst the Club Lloyds Monthly Saver allows up to £400.
Savings & Investments Breakdown
The table below shows how my money is distributed amongst my savings and investments.
|Club Lloyds Current Account||£5,314|
|Barclays Current Account||£1,334|
|RCI Bank Savings Account||£2,038|
|Club Lloyds Monthly Saver||£4,800|
|Premium Bonds (NEW)||£16,000|
So, these numbers include tax money and operating cash (day to day personal and business spends) so are not a true reflection of wealth. Discounting these accounts, the real value of my savings and investments are below: