Well, that’s Flexible ISA in a nutshell.

Flexible ISA is a fantastic tool for business owners because it allows us to move money in and out without losing the tax-free benefits. 

I will also share a clever way to create a big ISA allowance (say £100,000) without having to invest the money.

First, let’s quickly cover the basics.

How a Standard ISA works – The Basics

A typical ISA allows you to invest £20,000 every tax year. This is your £20,000 annual allowance. 

Your pot grows tax-free, as long as it remains inside the ISA.

But if you take any money out, then you lose that portion of your allowance permanently. 

You cannot “put them back in”.

Every deposit uses up your allowance.

To put the money back in, you either have to eat into your remaining allowance, if any or otherwise wait until next year’s reset!

Typical (Non-Flexible) ISA Example

For example, say you opened a new ISA in the new tax year and put £20,000 in it. You cannot put any more until next year, since your allowance is used. Sometime in May, you take £5,000 out of this pot. 

You cannot put this £5,000 back into your ISA. You’ll have to wait until April next year to deposit any new money, by using your next year’s £20k allowance.

In other words, your ISA from year 1 can only hold £15,000 of your own money (plus any shares appreciation). That’s bad.

The problem worsens if you have built a generous allowance over the years and have to use the funds to buy a house or something. You’d lose all these years’ allowances too. Ouch!

These restrictions apply to most ISAs, which is stupid if you ask me. All ISAs should be flexible.

A Flexible ISA solves this problem. Especially for business owners and limited company directors.

What is a Flexible ISA?

With a Flexible ISA, you don’t lose the equivalent allowance if you take money out of your ISA.

You can simply put them back in as long as you do it in the same tax year.

This illustration from Paragon who offers a flexible cash ISA is very useful:

Business owner example

For example, say you want to buy a house. Over the past 3 years, you have been maxing out your ISA and have accumulated £60,000 worth of investments.

You sell your stocks and put a £60,000 deposit. You now have until the end of the current tax year (April 5th) to replenish your ISA without having to lose all your allowance!

You could get a £60,000 director’s loan from your business on April 5th (just before the tax year ends), deposit it in the ISA, withdraw it on April 6th, and pay the business back.

This would keep your allowance intact even though no money is in it.

Neat.

This is why I believe a Flexible ISA is an amazing tool for limited company owners.

But I can think of other good scenarios too.

Note that with a director's loan, there can be tax implications for both the company and the director if the loan exceeds £10,000 or if it's not paid quickly as shown above. Your company may have to charge you interest on the loan (yes, even for 1 day). Check with your accountant before going down this path.

Who is the Flexible ISA for?

The Flexible ISA is great for you if you:

• Have an unstable income pattern (business owner or self-employed)
• Plan to sell your business
• Have an offset mortgage
• Take more dividends than you need just to top-up the ISA
• Plan to claim Entrepreneur’s Relief
• Await an inheritance
• Want to buy assets not available in an ISA (e.g Bitcoin) but keep your ISA allowance

As you can see, the Flexible ISA can work well for many different groups.

I’d like to dive deeper into two use cases.

Example #1: Selling your business or claiming Entrepreneur’s Relief

If you plan to sell your business in a few years, you can take advantage of the Flexible ISA to prepare a tax shelter for the sale proceeds.

Over the years you would be building up your allowance, growing your tax-free bucket.

Each year this grows by £20,000.

Year 1: £20,000
Year 2: £40,000
Year 3: £60,000
Year 4: £80,000
In Year 5, the business is sold.

£100k can now go into the ISA in one go and keep growing tax-free.

Example #2: Stop taking more dividends just to fund the ISA

I know many business owners who take more income out of their business, so they can just fund their ISA. They don’t want to lose the annual ISA allowance, understandably so. 

But at the same time, they don’t enjoy paying higher taxes since they don’t really need the money.

So they find themselves in a pickle.

What do they do? They typically draw more dividends to fund their ISA, stepping into the high-rate tax territory. So their overall income is £70k, even if they only needed £50k to live on.

Or £120k, when they only needed £100k.

A flexible ISA solves this problem too.

Instead of paying a higher dividend tax (33.75% or 39.75%) to fund your ISA, you could build a flexible ISA allowance over time, while investing through your company instead. Or just keeping the money as cash in the business.

This can result in big tax savings over time. 

As a result, you can secure your new ISA allowance without having to draw extra dividends from the business at a higher tax rate.

Here you could argue that not taking the dividends means lost opportunity cost in investment returns.

Because presumably, your ISA investments will grow, whereas your company cash won’t. I hear that. But there are options such as investing through your company or putting the money in a high-yield business bank account.

Flexible ISA with an offset mortgage: The perfect match

Like two communicating vessels, an offset mortgage is a perfect companion to a flexible ISA.

An offset mortgage is one where you can keep your mortgage equity in cash in your account, while the bank only charges interest on the remaining loan amount.

The offset account benefit is that you can access the cash anytime, without costly re-mortgaging processes.

Example: 

• House price £500,000
• Deposit = £200,000
• Interest 5%

You would keep the £200,000 in cash in your mortgage bank account, and only be charged interest on the remaining £300,000. You can have access to the cash anytime and grow or reduce the loan amount as you see fit.

Basically, like standard mortgages, but better, because it gives you the flexibility to use your cash.

With a Flexible ISA, an offset mortgage can work very well.

You can keep the cash in your mortgage to reduce your interest while topping up your flexible ISA just before year-end. Then a day later, you would return the cash back to your offset account.

As a result, you pay down your mortgage while using the same funds to grow your ISA allowance each year.

Offset mortgages are harder to find and potentially more expensive as choices are limited.

The Best Flexible ISAs

Most Flexible ISAs are Cash ISAs, but Flexible Stocks and Shares ISAs do exist.

Here is a list of the best flexible stocks and share ISAs for business owners:

1. Vanguard Flexible ISA
2. Charles Stanley Flexible stocks and shares ISA
3. BestInvest flexible ISA
4. Eqi stocks and shares Flexible ISA

What I like to see:

Flexible Cash ISAs are offered by many more providers, usually banks. These include Barclays, Paragon, Coventry Building Society, Tesco, Lloyds, TSB and Chip Cash ISA.

Always check the terms, because you may not have unlimited withdrawals.

We can help each other with some crowdsourcing. If you know of a good Flexible ISA let me know and I can add them.

I hope this article helped you to understand the great benefits a Flexible ISA can have for business owners, but also everyone else. I also want to see more Flexible ISA options in the future. 

Happy investing.

This article compares the performance of dividend funds with global equity funds for limited company investors.

My judgement is data-driven. I compare funds and indices.

I also look at the comparison before and after tax.

Tax might not be very relevant in an ISA or SIPP. But it plays a big role when investing inside a limited company or in a General Investment Account.

Even though this article is somewhat geared towards limited companies, the facts are useful to ISA and SIPP investors as well.

The results might surprise you!

Key takeaways:

• Global trackers outperformed dividend funds after 2008
• During 1994-2023, dividend investing performs better
• Limited companies can benefit from dividend investing thanks to tax benefits
• Finding good dividend funds is hard (but I provide a few options)

Note: A 'tracker fund' can technically track any index. When I refer to a 'global tracker' I mean one that tracks a broad equity index (e.g. FTSE All-World or MSCI World) which attempts to track the entire investable universe in developed and emerging markets.

Let’s start with the most popular dividend ETF in the UK in terms of size.

Take Vanguard’s All-World High Dividend Yield ETF (VHYL)

The biggest fund in the dividend category is Vanguard’s FTSE All-World High Dividend Yield (VHYL). Source JustETF.

This fund invests in global companies with high dividends. As of April 2023, it pays 3.80% per year. Almost double what a global tracker pays (2.00%).

Distributions happen every 3 months.

Naturally, it does not include as many companies as the global tracker does. The dividend fund invests in 1,812 stocks vs 3,782 for VWRL.

What’s in a dividend fund?

As of March 2023, here are the top 10 holdings of a dividend tracker (VHYL), next to the global tracker ones (VWRL).

If we look at the dividend fund sectors, Tech only makes 10% of the dividend index. A Global tracker has a 21% allocation in tech as per the fund’s factsheet.

MSCI provide a High dividend Yield index. Here are its sectors and country weights.

Banks, consumer staples and healthcare dominate the dividend index.

The global tracker on the other hand is dominated by Technology, Financials and Consumer Discretionary (Home Depot, Starbucks, McDonald’s etc) in that order.

Tech does not pay much in dividends and therefore, makes a much smaller part of a dividend fund.

Let’s do some performance comparison and let the money talk. Who wins?

High Dividend Yield Fund vs Global Tracker, Round One (2013-2023)

One way to compare a dividend fund with a global tracker is to compare two ETFs.

One that focuses on high dividends versus a global tracker ETF.

I will choose the most popular options out there, which also come from the same index provider, FTSE:

• Global tracker = VWRL – Vanguard FTSE All World
• High Dividends = VHYL – Vanguard FTSE All-World High Yield

Here is the comparison, assuming income is reinvested, using Trustnet charts.

As you can see, the Vanguard FTSE all world is a clear winner.

Had you invested £100,000 in 2013, your investments would be worth about £250,000 in 2023 in VWRL, versus £200,000 in the VHYL dividend fund. Both funds reinvested the dividends throughout the period.

And in Annualised Returns between 2013-2023:

Overall, since 2013, you would be better off with the Global tracker, instead of these seemingly juicy dividends.

But what about tax?

If you invested in an ISA or a SIPP, there’s really no difference.

But for those investing in a limited company, a dividend fund has better tax treatment.

That’s because dividends received from VHYL are not subject to corporation tax.

Most of the gains in Vanguard’s high-yield fund come from dividends. The yield is close to 4%.

While most of the gains in a global tracker come from capital gains and are therefore taxable.

The global tracker’s dividend yield is about 2%, much lower than the 4% for the high-yield fund.

However, even if we consider the worst taxation for VWRL, and assume the entire profit is taxed, it still ends up ahead.

So for example, with a starting value of £100,000, and an ending value of £250,000, we would make a £150,000 profit.

After 25% corporation tax, this would be £112,500. Still higher than the £100,000 profit for the dividend fund, about half of which needs to be taxed too.

Why did global trackers outperform dividend funds since 2013?

Tech likes to keep its earnings

Most tech companies do not pay dividends and prefer to reinvest their earnings in themselves.

Funds that focus on dividends exclude companies such as Google and Amazon, and these companies were the name of the game in the bull market of the 2010s.

The case for investing in VWRL over dividend funds after 2008 was obvious in hindsight. A long bull market, boosted by mega-cap tech companies such as Apple, Google and Facebook (FAANG) made the VWRL a clear winner here.

Share Buyback companies not included

The Shares Buyback trend is also something dividend funds missed. After 2008, many companies decided to reward their shareholders in a different way.

Investors have to pay taxes on the dividends they receive. No, not in your ISA, but in the US and probably elsewhere too.

Whereas if your shares appreciate in value, YOU get to decide WHEN to sell them. Dividends have to be taxed the tax year they are distributed.

Therefore, US investors prefer capital gains over dividend income for tax reasons.

In other words, they’d rather see their share price move higher instead of getting dividends in their brokerage account.

So companies began to buy back their own shares with the dividend money, instead of distributing it to shareholders. This boosts their share price and saves (or rather defers) investors’ taxes.

It also gives some flexibility to investors. They would rather be the ones choosing when to take the tax hit, by selling shares instead of receiving regular dividends.

Shares buybacks make some company ratios appear to be healthier too. For example, Earnings Per Share would go up if the same earnings are distributed to fewer shares (because the company bought back some of its own).

So this financial engineering helps them look better and pay hefty exec bonuses that are tied to these metrics…

But to close this parenthesis – Dividend funds would have included Apple if it paid a 5% dividend, instead of buying back 5% of its shares. But they don’t.

So in the 2012-2022 period focused on growth, zero-interest rates and share buybacks, the dividend funds lagged behind.

Got data?

If we compare funds since 2012, dividend funds underperformed world trackers.

But 10 years is not long enough to draw any meaningful conclusions.

I would love to get my hands on some good data, but these funds only started around 2012. Instead of comparing funds, a better way to do it is to compare Indices.

Funds track an index. An index provider (e.g. FTSE or MSCI) would issue a ‘High dividend index’ which defines what companies a dividend fund must hold to implement it. Here’s the MSCI high dividend fund methodology if you’re interested.

This is how most ETFs work. For example, HSBC MSCI World UCITS ETF tracks the MSCI World index. So instead of investing with HSBC, you could achieve almost identical performance by choosing the Xtrackers MSCI World UCITS ETF from DWS Deutsche Bank.

Now that we established Index data is a better comparison than funds, let’s see if we can go back further in time.

FTSE is not kind enough to offer index data to retail bloggers like me. But, thankfully, MSCI does!

2008-2023: Dividend Fund vs Global Tracker investing as a limited company

Let’s use MSCI index data to compare a global tracker versus a dividend fund before and after corporation tax. Corporation tax is what limited companies pay when investing.

MSCI All Country World Index vs MSCI All Country World Index High Dividend Yield

Here’s a quick glance comparison using the MSCI’s factsheet:

The MSCI data post-GFC paints the same picture.

Before-tax, investing $100 in ACWI would more than double your money (260% in 15 years, in dollars). Investing in the MSCI dividend tracker would offer 229%, slightly lower.

In GBP currency the numbers are higher because the dollar became much stronger against the British pound during that period. One British pound in 2008 could buy you 2 dollars. Right now, it buys just $1.23.

So a weaker currency would “boost” your returns when measured in the latter. The MSCI all world would return 386% in Sterling (vs 260% in USD)!

This is another reason to invest globally. You never know what’s going to happen with your own currency, economy, housing market etc.

But here’s the kicker:

What if we consider how funds are taxed inside an LTD company?

Would the dividend fund outperform an all-world tracker after taxes?

During 2008-2023, a global tracker would still outperform the High Dividend yield fund, even after accounting for corporation tax.

Without considering taxes, the All World tracker is 18.7% ahead of the dividend fund in GBP terms.

After paying the appropriate corporation tax on the capital gains, the global tracker is still ahead by 12.8%

So despite the more favourable tax treatment, the dividend fund is still behind between 2008-2023.

The difference, however, drops from 18.7% before tax, to 12.8% after tax.

Better fund taxation ‘improved’ the dividend fund results by 6% in 15 years.

It makes sense because dividends are corporation tax-free in a limited company. As a result, you would expect the dividend fund to improve its relative performance against a capital-growth fund after considering taxes because a bigger part of the returns is dividends.

But yes. As we see above, even in the scenario where a LTD company invests, the global tracker is still ahead.

For comparison purposes, I assumed that the entire holding is bought in 2008 and sold in 2023.

Yes, yes, I know this is not likely to be the case. People sell only what they need and things like salaries, business expenses, and pension contributions will lower the actual corporation tax.

But assuming the ‘worst case scenario’ for corporation tax, a global tracker beats dividend investing for limited companies between 2008-2023.

Round 3: Dividend Fund vs Global Tracker 1994-2023

They say you can tell any story you want if you choose the right time frames…

Despite the All-world tracker dominance in the past 15 years, the picture changes if we look at 20 or 30 years of history.

Since 1994, High Dividend Yield beats MSCI All World tracker by a large margin!

£100,000 invested in an MSCI dividend fund in 1994 would be worth £1.6m in 2023. An MSCI global tracker would be worth about £1m.

And that’s before considering the better tax treatment of dividends inside a limited company.

The picture is similar for the period 2000-2023 as well. The dividend fund is ahead if we include dividends.

Data note: In the real world, a foreign tax office would deduct some percentage (0% - 30%) from dividends before distributing them to international investors. The dataset only offers Gross dividend treatment (no tax deduction) since 1994, and only Net dividends since 2001. So the gap would close a bit in favour of the Global tracker, but the difference would still be significant. For example, between 2001 and 2023, the gross dividend comparison fund is ahead by 16.1%, but only 8.9% when using Net dividends.

Why did the dividend fund outperform the global tracker since 1994?

The dividend fund did not lose so much value in the Dotcom crash of 2000, and consistently outperform up until 2008.

Perhaps this is more obvious if we see the chart in LOG terms.

Since 2008, the Zero Interest Rate Policy (ZIRP) era boosted growth companies, instead of value.

Inflation was low and global interest rates stayed low. Investors were more willing to reward companies with projects which can take a long time to yield results.

The cost of borrowing was cheap, and so was the cost of investors’ capital. With low inflation, investors were more patient.

The ‘price of money’ was cheap.

Since 2022, the landscape has changed. We no longer have zero rates. In fact, during 2022-2023 central bankers made the fastest rate hikes in history. From zero to 5% in the US (4.25% UK and rising).

Some say we will not go back to the previous low-interest rate world. IMF thinks we will.

But one thing is clear: A global tracker had beaten a dividend fund only for certain periods. Not always.

As we see above, history tells us there are reasons to choose a dividend tracker over a global tracker, especially inside a limited company where taxation is guaranteed to be better with current rules.

Here are the arguments on both sides:

Reasons to Choose a Global Tracker Fund over a Dividend Fund when Investing as a Business

Despite the 30-year outperformance of dividend funds, there are good reasons to choose a global tracker over a dividend fund when investing through your limited company.

1. Innovation and growth

First of all, why exclude hugely profitable companies from your portfolio like Apple, Amazon and Google?  You would, at the same time, exclude big innovators, because a lot of innovation happens in tech, which typically doesn’t pay dividends.

An all-world equities fund, also known as a global tracker, gives you access to almost all companies in the world. The dividend fund, on the other hand, focuses only on companies distributing dividends.

If OpenAI or Stripe get on a stock exchange, they probably won’t be paying dividends. You might miss out on a few companies that make it BIG. What if in the future performance comes from these few companies? I’m not saying that’s a good thing but place your bets accordingly if it does.

2. Truer Passive Investing

If you follow the passive investing approach, market purists say you should be holding all companies according to their market capitalization.

By choosing a dividend fund, you would be diverging from the “true” passive investing mantra and engaging in some form of factor investing.

As we saw above, dividend funds worked better during 1994-2008 but performed worse from 2008-2023.

3. High dividend companies do not re-invest in their growth

High dividend-paying companies don’t re-invest their earnings into their own projects to the same extent low or no-dividend-paying companies do.

Dividend companies prefer to pay money out to shareholders. Is it because they put shareholders first or is it perhaps because they don’t have a great use case for the capital?

By investing in an all-world tracker you benefit from the entire economic output as much as possible, and don’t discriminate against companies based on one factor.

4. High dividend yield ETF options are very limited

Seems like we only have a few UK options for high-dividend funds. MSCI High Dividend Yield ETFs have changed to now track an ESG dividend index instead.

Then there’s always the Vanguard FTSE All-world High Dividend Yield ETF (VHYL). But this is a shame because FTSE does not make the data available since 1994 as MSCI does. Did FTSE High Dividend Index outperform its global tracker?

For all ETF options see the section below.

Reasons to Choose a Dividend Fund over a Global Tracker when Investing through a Business

Choosing a dividend fund instead of a global tracker becomes an easier choice if you consider

• The outperformance since 1994
• Better tax treatment for limited companies
• The behavioural benefits

1. Dividend funds outperformed over a 30-year period

The MSCI High Dividend Yield Index performed better than the MSCI All Countries World Index (ACWI) from 1994-2023.

So choosing a dividend fund can yield better results.

For a company to pay dividends, it is usually profitable. This means you would be investing in a company that makes money. I know this sounds obvious, but even huge companies like Tesla took many years before they became profitable.

2. Better tax treatment for Limited Companies

As long as tax law remains the same, limited companies have a guaranteed advantage when investing in dividend funds over other funds.

LTD company investors have a head start over global tracker investors because dividends are not usually subject to corporation tax.

As a result, you get to keep more of the returns your fund generated.

This is not the case for General Investment Accounts (GIA) for individuals. Depending on your personal tax band a dividend might work better or worse compared to capital gains. I’m talking about those individuals (not companies) who hold accounts outside an ISA or a pension.

3. Easier to hold – Behavioural win

With a dividend fund, you are getting paid for just holding stocks. How cool is that :)

Theoretically, price appreciation should feel the same. But the truth is that as humans, we feel different when a dividend cash payment lands in our account.

It’s also part of the reason income-seeking investors like those in retirement love income funds. Because they provide a feeling of getting a ‘regular paycheque’ which is known upfront.

I love it too. Who doesn’t?

Global Tracker and Dividend Funds / ETFs for UK Investors

Here is a list of global trackers and dividend funds.

Global Trackers

Dividend funds

Some other popular dividend funds include:

• SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV)
• Fidelity Global Quality Income UCITS ETF (FGQD)
• Xtrackers STOXX Global Select Dividend 100 Swap UCITS ETF (XGSD)
• JPMorgan Global Growth & Income PLC (JGGI)

As you can see, there is no dividend fund that tracks the pure MSCI High Dividend Yield Index that my research focused on.

They now track the MSCI High Dividend Yield ESG Reduced Carbon Target Select Index (read their factsheet) with companies that satisfy certain ethical, social and governmental (ESG) characteristics. This is why only 200 or so companies make the index. The performance is only available since 2010 which is probably when the ESG index was created.

Its performance comes very close to the MSCI World and is almost identical to the MSCI High Dividend Yield Index.

Based on the above, it is a shame that there is no true passive “MSCI High Dividend Yield” ETF out there! It looks like ESG spoiled the party.

The ESG one comes very close, and another option is Vanguard’s VHYL.

Are dividend funds worth it?

You often hear that dividend trackers are suboptimal to broad equity trackers. This was true after 2008 but dividend funds performed much better pre-2008.

On top of that, UK limited companies have an advantage when investing in dividend funds, as the dividends are not subject to corporation tax.

There are certain advantages when choosing a dividend fund, such as Vanguard’s All-World High Dividend Yield (VHYL).

It is easier to hold because it pays you a decent income. In a changing rates environment, it might perform better too.

On the other hand, a broader global tracker such as Vanguard’s All-World ETF (VWRL) might be a better option, despite the worse tax treatment.

Personally, I am not changing my strategy despite the juicy dividend yields. But I won’t blame you if you will, especially with a smaller allocation. It doesn’t have to be all or nothing.

If you want to generate a high yield on your savings, check out the best places to hold cash in 2023 article. It contains high-yielding short-term government and corporate bond ETFs as well as money market funds.

Another option is to choose high-yielding UK REITs if you enjoy investing in property funds.

I hope you enjoyed this article and Happy Investing!

Thanks to UK’s higher interest rates, you can make your cash work harder in 2024.

This article explains how Savings accounts work, Money Market Funds, Cash ISAs, Premium bonds, NS&I products, Short-term Gov Bonds, their rewards, risks and their taxes.

Before we dive deeper, here is a summary of the best places to hold cash in 2024:

Let’s dive deeper. By stating the obvious:

Banks are not paying you the full interest

Banks being banks…

The Bank of England rate was 5.00%, but my Santander bank account only paid me 1.98% (gross).

What gives??

No, this is not another ‘switch to this bank’ type of article. Neither is a reason to write a complaint to your high street bank.

We all know banks are here to make a profit and that’s exactly what they’re doing with my hard-earned cash.

They take my money, earn a 4% interest on it and then pay me just under 2%. They bank the difference.

That’s right. The Bank of England pays them to hold my money. Then it’s up to the commercial bank to decide what to do with my cash.

They can lend it out to mortgage buyers, issue a business loan or simply sit tight and earn the difference.

They are in the margin business, like my good old bookmakers. Consumers, as usual, are missing out.

Time to change that.

What if I told you you can earn the Bank of England rate at all times?

Or that there’s a much better way of saving cash?

Without having to switch to the latest “best savings account” every three months. Or lock your money for years.

1. Savings Accounts

Savings accounts are probably the first thing that comes to mind.

So they deserve an honourable mention.

Perhaps the easiest thing to do is to shop around for the best savings account to park your cash.

This savings account will pay you 3% per annum. Unlike high-street banks, they are quick to pass on the Bank of England rates.

However, the ‘Saving accounts’ approach has certain limitations:

• It’s time-consuming (opening an account, KYC, switching etc)
• The rates are not great (3% when the Bank of England base rate is 4%)
• Low limits for really high-interest savings accounts (e.g. 5% only up to £250 per month)
• Sometimes these banks are unknown

You could even boost your returns by locking your cash away for a certain time, say 1 year, and get a higher return. Think 4%.

You would lose access to your cash but fix your money and earn a higher interest. Withdrawals are not normally allowed in fixed-term saving accounts.

High Yield Savings Account for Limited Company

Limited companies don’t miss out. Limited companies can also earn between 2 – 2.6% p.a. for easy-access savings accounts or about 4% p.a. for fixed 1-year or 2-year deals.

See bank comparison sites like Moneyfacts to find the best bank accounts.

Not bad, especially since your money is 100% safe, assuming the bank is covered by the FSCS scheme. You are protected up to the first £85,000 per person per bank.

Check out also the Flagstoneim platform if you have £50k as an individual or £1m as an LTD company. They can offer better rates for a fee.

Problem is, of course, you lock your cash away, or earn a subpar interest rate.

The best easy-access account from “The Cumberland” offers 2.6%.

If you go for the fixed-term option, you won’t normally have access to your cash. Withdrawals are not allowed.

A happy medium (but a more limiting choice) is the Notice savings account. They pay slightly higher rates. But the bank asks you to give notice (usually 3-4 months) before you need your cash to avoid losing the interest you earned.

Do I have to pay tax on the savings account interest I earn?

Yes, you would have to pay tax on the interest you earn from savings accounts.

Basic rate taxpayers (up to £50k annual income) have a £1,000 tax-free interest allowance every year. Higher rate taxpayers (£50,000 – £125,000) have a £500 tax-free interest allowance.

The rest is taxed as income.

Limited companies have to pay corporation tax on the interest they make from savings accounts.

2. Cash ISAs

Cash ISAs are a type of tax-free product to park your cash. You can deposit up to £20,000 in a Cash ISA per tax year.

With Cash ISAs, you don’t pay any tax on your interest. But you trade the contribution you would have made into a Stocks and Shares ISA. And why would you?

Right now, Cash ISAs pay 2.9% for an easy access one, or about 4% fixed for one year with Barclays.

If you’re saving for a first home, consider a lifetime ISA. It pays you a bonus of 25% on your savings if you use it towards buying your first home or retirement. You can only open one if you’re between 18 and 39 years old.

Cash ISAs also benefit from the FSCS protection, £85,000 per person per bank.

Overall, even though savings accounts and Cash ISA are the most popular options, they often are a hassle to deal with.

It’s much easier to switch between funds in a stocks & shares ISA or in your LTD company brokerage account. This is why I like money market funds, as we will see later.

3. Premium Bonds: Feeling Lucky?

Premium bonds are another savings vehicle.

If you like a bit of ‘luck’ involved, Premium bonds are meant to give back an ok savings rate, tax-free!

You can invest a maximum of £50,000 in premium bonds. In total, not per year.

There is no tax to pay when you “win” a prize in premium bonds. There are no interest but “prizes”. You can even win up to £1m prize if you’re the lucky one.

The average earnings are 3.30% per year as per the NS&I premium bonds website.

However, most of the earnings are skewed by the few people who earn the big bucks. So the average is not a great metric of what you will earn.

With a £50,000 premium bond pot, you will earn about 2% per year as the median person, Martin Lewis calculator says.

The more you invest the higher the likelihood you will earn something.

Pros:

• Tax-free savings
• You can buy for your children too (up to 16 years old)
• Cash in anytime
• A fun way to save!

Cons:

• Not keeping up with inflation
• You might win nothing
• OKish average savings rate

Are premium bonds safe?

Yes! Premium bonds are issued by the National Savings & Investment (NS&I), a state-owned savings bank backed by HM Treasury.

I’d say they are as safe as the FSCS protection you get in your Barclays account.

4. NS&I Income or Growth ‘Bond’

NS&I offers two great savings products. They call them ‘bonds’ but they are more like a locked savings account:

• Guaranteed Growth Bond at 4% per year, fixed for 1 year
• Guaranteed Income Bond at 3.9% per year, fixed for 1 year

They are both one-year products.

You can think of the income bond as one that pays you monthly until the end of the term.

Whereas the growth bond will only pay you at the end of the term as a lump sum. Your initial money plus the interest.

Even though the NS&I products are called “bonds”, they don’t suffer from the ups and downs of your capital like a traditional government / corporate bond would.

Traditional bonds suffer from interest rate risk. If interest rates go up their price goes down (and vice versa). Unless you hold them until maturity.

But the NS&I ones don’t suffer from any price fluctuation. You are guaranteed to get your annual return at the end of term.

They are more like savings account in a bank.

The downside is that you cannot take your money out until the bond matures.

Pros:

• Good yield on cash
• Low starting minimum of £500 and max of £1m

Cons:

• No access to your cash before the end of term
• Interest is taxable😞
• You cannot buy these in any ISA

You have 30 days to change your mind after investing in these NS&I products. After that, you cannot access your money until the end of the term!

Honourable mention: If you are one of the lucky ones who hold the old NS&I inflation-linked bonds, you get your cake and eat it too! NS&I inflation-linked bonds were savings products where you could earn the inflation rate each year, without any capital volatility.

5. Money Market Funds: What are they?

Money market funds (MMF) are investment vehicles that aim to provide interest on your cash by holding cash and short-term debt.

They are used by pension funds, institutional investors and companies to manage cash balances.

MMFs pay investors the interest minus some fees. Their fees, however, are typically low. 0.15% per year or so.

The greatest thing about money market funds is that you can expect to earn around the Bank of England rate, automatically.

No bank switching hassle, no locking periods, and even no tax if held inside an ISA or a Pension.

Someone else (the fund manager) has the job of putting your cash in different places and paying you the interest minus fees.

MMFs are the safest instrument you can find in the investment assets spectrum, almost like cash.

These vehicles are not a new phenomenon. They have been around since 1971 and are much more popular in the US.

MMF won’t wait for a month or two until they pass on the Bank of England’s higher rates to you. I’m looking at you, Santander.

How much can I earn in a UK Money Market Fund?

A UK buyer of a money market fund will roughly earn the SONIA rate (Sterling Overnight Index Average).

This is very close to the Bank of England rate. SONIA is what the banks pay to borrow GBP overnight from other financial institutions.

It is the ‘risk-free’ rate, issued by the Bank of England.

At the point of writing (February 2024), the SONIA rate is 5.18%  whereas the Bank of England base rate is 5.25%.

Money market funds could even beat that, as they make cash deposits longer than ‘overnight’.

For example, you can get 4.70% per year by stashing your money in the Blackrock Cash Fund. The 4% rate hike only happened in February, so as older deposits are redeemed, new ones should pay higher rates.

The Royal London Short Term Money Market Fund shows a 3.30% annual yield in its latest fund reporting document which is from December. It should now be closer to 4% given the interest rate hikes.

These yields fluctuate depending on the environment. But a short-term money market fund should pay rates close to the SONIA or Bank of England rate over time.

How to buy a UK money market fund?

You can buy a UK Money market fund from your investment broker platform. For example, you can buy MMF in a stock and shares ISA like Halifax Sharedealing or a general investment account like Interactive Brokers (click for my full review).

It is as if you are buying any other fund.

Now, let’s get to the real question: Are money market funds safe?

Given this is where I put my cash, are MMFs as safe as cash? How risky are UK money market funds?

Are Money Market Funds safe?

UK Money market funds are very low-risk but not zero.

Blackrock puts it at the lowest risk of the risk spectrum 1/7.

The Fitch Rating gives the Royal London cash fund an AAA rating.

AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

Fitch ratings

But regardless of what these institutes say, it’s probably better to look under the hood to see how the sausage is made.

What do they do with our cash?

Here is Vanguard’s Sterling Short-Term Money Market Fund:

And here is what the Blackrock Cash Fund invests in:

Certificate of deposit and time deposits mean fixed-term cash deposits in other banks. These makeup more than 60% of the fund. This cash is held in other banks to help them with short-term needs.

The Financial Company Commercial Paper is a form of unsecured debt issued by corporations, usually banks, like UBS, NatWest and ING bank. So not exactly cash.

Asset-backed commercial paper is very similar but backed by an asset (not unsecured). A floating rate is again debt with variable interest. UK Treasury bills are very short-term government bonds.

So yeah, as you can tell these are not all cash deposits.

Maturity matters too.

Looking at the maturity tab, more than half of the fund’s deposits mature in less than a week. The Weighted Average Maturity is 52 days.

No, your money is not locked. You can get your money by selling the fund without any lock-in periods. But the fund rolls in and out of fixed-time assets as you hold it.

And finally, the credit quality of the issuer is in the ‘extremely strong’ category of A-1. The short-term credit ratings by S&P range from A-D.

Another thing I’m looking at is history and track record.

Have money market funds ever failed?

Since 1978, three US funds failed to return the full pot to investors. And even in these extreme instances, the value lost was negligible.

One money market fund went below its cash value in 1978. It lost 6% of its value. According to Wikipedia, it was not a true money market fund, because the average maturity of securities in its portfolio exceeded two years.

Then in the doom days of 2008, investors rushed for the exits. They stressed money market funds too, probably to cover margin losses elsewhere.

One US Money market fund, called the Reserve Fund faced a bank run scenario and was forced to liquidate. It distributed payments over the years and it eventually paid 99.1% of the money to investors.

In 2008, the US Treasury stepped in to prevent a run-on-the-bank scenario everywhere. It guaranteed the holdings of any public MMF that paid a fee to participate in this ‘insurance’ program.

It was a nice way for the US treasury to make money too.

In the UK, no money market fund has ever failed to return money to investors.

But even if you are happy to accept the low risk of losing any money, perhaps another question is: ‘Can MMFs guarantee I will be able to get my money back at all times‘?

And the answer is no. MMFs cannot guarantee daily redemption under all circumstances. For example, if a “run on the bank” happens to a fund it cannot guarantee same-day liquidity.

The fund might ‘gate’ them.

Part of the reason is that some of its assets are fixed weekly or monthly. Regulation is there to ensure the proper operation of the fund so that investors actually take all their money back. And that’s a good thing.

During Covid, some MMFs faced increased selling from investors. They didn’t, however, lose any money or prevented any selling.

I’m inclined to say holding cash in a money market fund is extremely safe. But not as safe as the 100% guarantee you get from your bank’s savings account.

Having said that, the FSCS protection DOES apply to UK-domiciled Money market funds, if the provider fails (e.g. BlackRock). So you would get £85,000 per person per provider (not per fund).

As always, the devil is in the details.

Money market funds are not all made equal. For the safest option, you should look at Short-Term Money Market Funds. These are regulated to hold only the highest-quality debt and weighted average maturity under 60 days (see FCA guidance 2022).

See also the four MMF categories here. Basically, the Standard Variable MMF is the more relaxed option that I would avoid. That’s because it allows for assets with a maturity of up to a year. None of the ones I mentioned here is SVMMF.

MMFs are regulated and have certain rules to avoid putting too much cash in one institute. For example, an MMF shall not hold more than 10 % of holdings issued by a single body.

For example, the Royal London Short-term Money Market Fund has a duration of approximately 20 days. The Blackrock Cash Fund has a Weighted average duration of 52 days. Both are Short-term Money Market Funds.

If you want to torture yourself as I did, you can read more about the European MMF regulations or the more interesting Resilience of Money Market Funds paper issued by the FCA in 2022.

Best UK Money Market Funds

Here are the best short-term UK Money Market funds for UK investors, sorted by highest yield.

1. Blackrock Cash Fund, 4.44% yield, 0.24% fees
2. Royal London Short Term Money Market Fund 3.30% yield (December 22)
3. Legal & General Cash Trust, 3.10% yield (December 22)

Note that the Royal London and the Legal & General funds have not updated their yields since December. They should be generating higher returns by now, as shown in the below section.

The Blackrock Cash Fund (Class A dropdown) started in March 1990! This gives extra credibility.

It has been through the Dotcom crash of 2000-2002 and the Great Financial Crisis of 2008-2009 without a blip.

Can you guess where the zero-interest-rate policy started? 😉

Here’s how to find the Best UK money market fund yourself:

How to find the Best UK Money Market Fund

1. Go to this Morningstar page: Morningstar Financial Research, Analysis, Data and News
2. Select Morningstar Category GBP Money Market – Short Term
3. Click Short Term Performance Tab
4. Sort by highest 1-month return
5. Filter from the top, the highest-yielding GBP money market fund

Here’s what it looks like.

For example, the Blackrock Cash fund tops the list with a 0.37% 1-month return. That’s 4.44% per year.

It’s also top in the 3-month return, behind the Blackrock Cash fund.

Because these funds have cash deposits that are claimed in less than 60 days, the 1-month and 3-months are the best indicators of what the fund will pay in the future.

Notice the difference between the 6-month return of 1.39% (annualised: 2.78%). That’s because the rates were much lower back then. With current rates at 4%, a 1-month 0.37% return is a 4.44% annual return.

Going earlier than 3 months will show returns when the interest rates were 1-2% which would distort the current picture.

The good thing is the money market funds compete with each other to give us the best outcome.

How to calculate the Money Market Fund’s actual yield

Finding the annual yield for a money market fund is challenging.

Why can funds not report the yield to maturity at all times?

Part of the reason is the interest is variable. So they cannot estimate what they will get back down to the penny.

In the Morningstar dashboard aboard I extrapolated the annual returns from the past return. This works ok, but it’s not 100% accurate.

Some funds, like the Royal London one, report an annual yield, but that’s the past 12 months one. In a variable interest rate environment, this is not useful.

At least BlackRock gives a daily yield. If you average it out for a week or two, this will give a good estimate of what the fund pays out. Assuming that every day you reinvest the amount, the annual yield is actually slightly higher.

The 12m trailing yield is almost a worthless indication of this year’s expected performance because the rates have moved so much in between.

How are money market fund payments taxed?

UK Money market funds pay interest that is taxable. If you hold money market funds inside an ISA, they are tax-free.

If you buy a money market fund in a general investment account, then you would have to pay income tax on earnings above your personal savings allowance.

Basic-rate taxpayers have a £1,000 tax-free allowance before they pay any interest though. Higher rate taxpayers (40% tax) have a £500 tax-free allowance on the interest.

The Money market fund payments are of interest type, not dividends. Therefore their tax will sting in a general investment account. 20%, 40% or 45% depending on which tax band you fall into.

Sorry, no tax-free interest for additional rate taxpayers (£125,000+ in gross earnings from April 2023 onwards).

Limited companies would have to pay corporation tax on the interest they earn from money market funds.

You can deduct other expenses or investment losses against your corporate profits.

Bottom line – Money Market Funds

Use money market funds to earn a decent yield on your cash, like banks do when they lend each other money using the interbank SONIA rate.

Money market funds are not 100% risk-free. They are still an investment, of very low risk.

I would put the money market funds risk below bonds and equities but above cash.

They are meant to hold, not grow your capital after you consider inflation.

UK MMFs are FSCS protected if their provider fails, up to £85,000.

Use Short-Term UK-domiciled Money Market Funds to eliminate as much risk as possible but also earn a reasonable yield that beats your bank.

Choose reputable providers with a long track record. For example, Blackrock is the top asset manager with $10tn assets under management. The fund’s track record matters too. The fund existed since 1990.

Money Market Funds can be particularly useful as a higher-rate taxpayer or for holding cash funds in an LTD company. Most FTSE 100 companies use them by the way.

In my view, my 3 months emergency fund should always be in a bank account. But I keep some of my cash for short-term goals in UK short-term money market funds.

The yield is worth the (very low) risk to me. Easy access, solid track record, no switching hassle, and tax-free advantages. It is one of my favourite choices.

6. Short-term Gov Bonds: Another way to play the high-interest rates

Short-term government bonds can provide a good balance between getting a decent yield exchange for some price fluctuation.

The UK or US are extremely unlikely to default on their debt. So you will get your money back (zero credit risk). From a credit perspective, it’s as safe as the FSCS protection!

Your future money might not be worth as much as today though, due to inflation. But this article is about Cash, and you know that already.

How much can you earn in short-term gov bonds?

Take the US 1-3 years Treasury Bond IBTG ETF. It yields 4.70% per year and the US gov bonds are hedged back to GBP.

Foreign bonds have currency risk (e.g. you hold dollar bonds). But some bond funds, like the IBTG above, are hedged so you avoid the currency risk.

The Weighted Average YTM is what you care about here. This metric shows how much you will earn if you hold the fund to its maturity, which is 1.90 years as per the Weighted Avg Maturity metric.

The fund bonds were bought at different times and mature at different times (1-3 years). The Weighted Average YTM takes all of them together and shows what the fund yield would be if you were to hold the fund for its average maturity.

-> Sell it earlier and you might make a bigger profit than the yield if US rates have moved down.

-> Hold it for longer and you might make less money if US rates have moved up.

For example, in the zero rate environment pre-2022, bonds got hammered due to the quick spike in interest rates. Now interest rates are already high and these short-term bonds are way safer from rate rises.

So here’s your guaranteed 4.70% per year backed by the US government and no currency risk. Assuming you hold it for about 2 years.

There’s an even shorter duration fund that holds dollar bonds with 0-1 year maturity, unhedged. IBTU pays 4.76% per year and holds US gov bonds with 0-1 year maturity.

However, this one is not available in ISA/SIPPs. I could buy it in my limited company account using Interactive Brokers.

Here is an Invesco Invesco US Treasury Bond 0-1 Y UCITS ETF (LON: TIGB), yielding 4.76% per year, 0.5 years maturity/duration, that you can hold in an ISA, SIPP or a limited company. Thank you, reader George for pointing that out!

If you prefer the UNhedged version of holding short-term dollar bonds, you can go for the equivalent TREI Invesco US Treasury bond 0-1 UCITS or the PR1T Amundi Prime US Treasury bond 0-1Y UCITS ETF DR – USD.

The IGLS iShares 0-5 years UK Gov bond ETF caught my eye too. The difference here is that it invests in UK government bonds only, not in the US. But the average maturity is 2.5 years, so not quite short-term. Nonetheless, it’s an option if you don’t mind the longer maturity profile and only want to trust the UK government.

Other notable mention:

• XSTR Xtrackers II GBP Overnight Rate Swap UCITS ETF. Tracks the SONIA rate and invests in short-term UK bonds.
• CSH2 Lyxor Smart Cash – Tracks the SONIA rate and is actively managed but low fee 0.07%

7. Ultrashort Corporate Bonds: Feeling more adventurous?

If you’re feeling more adventurous and want to take more risks for a higher yield, have a look at ERNS.

ERNS is a corporate bond fund with a very short duration (3 months) in GBP currency.

Its expense ratio is 0.09%, so very low.

It invests in industrial, financial, and utilities bonds as well as government-like ones. Its holdings are defensive.

For example, its top 5 holdings are

1. European investment bank bonds,
2. International bank for reconstruction and redevelopment,
3. Bank of nova scotia,
4. KFW and
5. Nationwide.

The yield to maturity is 4.60% per annum and the 0.34 duration makes it extremely resilient to interest rate moves. In March 2020 it went down by only -0.4%, temporarily.

However, we are talking about corporate bond funds now, and it’s an entirely different profile from cash. Even if ultrashort, you are taking credit risk and companies like banks can always go bankrupt.

The past 10 years have been smooth sailing despite Covid (-0.4% in March 2020), Brexit, Ukraine etc.

The ultrashort maturity profile combined with its defensive holdings and good track record made me include it in this post.

Even though this is a defensive option, it cannot be compared with cash in the bank. It has a higher risk profile, but it’s worth considering if you want the extra yield.

Choose the UESD if you prefer the ESG option of ERNS.

Another one to check out is JGST by JPM which pays dividends monthly (thanks Neil). So it might be more suitable outside an ISA or when investing as an LTD company.

A slightly riskier option to ERNS is PIMCO QUID ETF.

8. Mortgage interest: Earning Money by NOT paying it

That’s right. Instead of saving your cash in an account, consider putting them into your mortgage account instead.

An extra pound that is NOT going towards your mortgage interest payments, is a tax-free gain of equal measure.

So if you make a £10,000 overpayment and your mortgage interest rate is 4%, that’s £400 savings every year.

Now that mortgages are anywhere between 4-6%, it’s a great way to save. Again, tax-free!

Sometimes, it can be even better to pay down the mortgage than invest or rather than hold bonds.

If your bond is paying 2.5% and your mortgage interest is 3%, you could make an extra mortgage payment in exchange for locking your money away. A bond is more liquid than a mortgage.

The extra mortgage payments are not only helping you ‘earn’ the interest rate, but also unlock better rates when it’s time to remortgage. This is because your future loan-to-value will be lower.

Important: Check for mortgage overpayment extra charges. Many mortgage providers penalise you if you make overpayments above a certain threshold. We are their assets after all, and they want us to continue being so!

That was a much-needed overview of all the best places to hold cash in 2024. But how much cash should we keep?

How much to keep in cash?

We, humans, like cash because it gives us a feeling of safety. So this question can be very different because psychology and emotions play a big role here.

What works for me might not work for you.

However, as long as you have a good emergency fund then there is no reason to keep hoarding cash.

Cash is almost guaranteed to lose out to investment assets like companies and housing over the long term, for the simple reason: inflation.

Personally, I keep 6 months of living expenses in cash. The rest is invested.

Cash, however, is not just for emergencies. For example, you might have a certain life event coming in two years, like buying a house, going on a world trip, or funding a new business.

I’d put these life events in different buckets and keep funds in cash for anything less than 3 years. So instead of keeping it in Barclays at a 0.6% rate, try one of the above products.

For goals longer than 3 years, you can do some liability matching and match certain investments.

Perfect is the enemy of good. Therefore, don’t overthink it because the perfect asset allocation only exists in hindsight. The longer the timeframe the more risk you can afford to take.

One starting rule of thumb for investing is “Place 120 minus your age in aggressive assets and the rest in defensive assets”.

Holding Cash is Exciting Again

This article summarised all the best places to hold cash in the UK in 2024.

UK taxpayers can earn around 4% in various ways. In most cases, risk-free and tax-free too.

We suffered a period of zero interest rates, where governments printed money and assets were inflated. Previously, this rewarded investors and punished savers.

Looks like with higher interest rates come some relief for those who want to see some yield on their cash.

With high inflation, holding cash is not a great situation to be in, but at least you now get something back.

High inflation is the reason I am not changing my investing strategy unless cash returns at least 8%.

What about you? What do you plan to do with your cash?

Thanks for reading.

Are you a business owner? Then check out the Company Investing Academy and find out how to best invest your business funds.

Join 200+ business owners who learned how to build wealth and supercharge their businesses.

Andy is launching the Conviction Life Sciences company where investors can take part in this new venture.

It is a “reaction to a structural opportunity which we think is very rare” targeting 20% annual returns on average.

Disclaimer: Nothing in this article or video should be considered financial advice. Please do your own research before making any financial decisions.

There are structural reasons that biotech and life sciences companies can be great investments right now. Non-US companies, particularly, trade at cheap levels and are on Andy’s radar.

In this interview we cover:

• What life sciences and biotech really mean
• Life Sciences current state (curing cancer, the cost of developing new drugs, clean power generation etc)
• How investors can benefit from the rising biotech trends
• Why this market is so undervalued (and is this a value trap?)
• How much to allocate in high-risk high reward investments

I hope you will enjoy the interview as much as I did. Here is the YouTube video:

Why UK Biotech stocks are a great buy

UK Biotech stocks are structurally undervalued and can be a great buy for the following reasons:

1. Generalist Fund managers ignore small companies that cannot be valued with traditional economics (DCF etc)
2. Big American funds are too big to bother investing in small foreign companies, especially those that require a lot of research and are high risk
3. The non-US biotech companies have been very volatile with mediocre returns so far. The industry’s reputation took a hit.
4. Technology has made biotech research very cost-efficient compared to 20 years ago. This unlocks opportunities.
5. The COVID pandemic offers a tailwind for investing in the biotech sector. More money flowing in means more research and attracts people and more capital.

Andy is a best-seller author of the book How to Own the World and a repeating guest.

We have talked about investing in stocks, property and gold before here:

• Interview with Best Selling Author Andrew Craig
• How to Own the World Book Review

Thank you for watching!

The most common new year resolution is to exercise more, followed by ‘lose weight’ and ‘improve my diet’.

Sorry ‘save more money’ and ‘career ambition’, you only come 4th and 5th!

But even though goals are better than nothing, they are not very useful.

Every January, I keep going back to what James Clear (Atomic Habits) says:

Forget about goals, build systems instead

Build systems, and the score will take care of itself.

This applies to everything: weight loss, investing, career promotion etc.

For example, say your goal is to lose 20kg.

How do you go about it? The goal might seem daunting at first and can quickly end up in the ‘too hard’ pile.

You have a rough idea – cut down on snacks and junk and eat more salads and fruits instead. Try combining it with exercise to make it happen faster.

Easy in theory, hard in practice.

A system consists of simple routine tasks you can do without much effort.

For example, cooking at home might help you lose weight if you plan meals ahead. As long as you stick to it, that is!

Your system might include what recipes you make, how you’ll source the ingredients and how often you cook.

Every Friday lunchtime, for instance, you’ll order next week’s ingredients online. You’ll cook in batch mode every Monday and Thursday for the rest of the days.

On Friday or Saturday, you can reward yourself with a takeaway dinner.

Goals help set the vision.

But a system will make or break the progress towards your goal.

You can apply systems to all areas of your life. Entrepreneurship, getting a promotion at work, being a good parent, and investing and saving.

Different goals can have synergies between them. For example, cooking at home will help you lose weight and save money.

The benefits of having a working system go beyond achieving the goal. Because they make sure you stick to it and stay caught up.

When having a system, you take advantage of this continuous improvement that compounds over time.

My goal: Strengthen the body

After spending some time with a pro-CrossFit athlete, I got enough motivation to start working on my body again (Thanks V! )

I need to stick to the system of hitting the gym every second day, with no exceptions.

I can do it most days, but some other days are hard! Like really hard, no motivation etc. I focus on making the bad days count. If I can make the bad days count, I can keep going.

I also feel much happier after a workout, which gives me another reason to do it.

FTSE 100 All-Time high – Not in the news, is it

It took two decades, but the FTSE 100 is at an all-time high!

There’s always a bull market somewhere !😉

That’s right; our UK home index has hit an all-time high (in British pounds).

You won’t see this in the news, maybe in some #Fintwit circles I lurk in, but that’s about it.

I am not ignoring the cost of living squeeze and the high prices. Households are struggling.

But at the same time, I will highlight a positive when I see one. Optimists live longer, they say.

If you are in a position to have savings, you are at a great place already. Consider putting those savings to work to beat inflation, which is (slowly) dropping.

Oh, those mortgage rates are following too.

Company Investing makes an impact!

More than 200 business owners have taken the company investing course so far.

I am very grateful, and it’s nice to see this makes a difference in people’s finances.

In January, we had two live Q&As where I met some very clever business owners. We had good fun talking about tax, investing and business.

The live Q&As are part of the course and go hand in hand with the recorded videos, notes and spreadsheets.

Are you interested in joining us? If you are running your own business, check if the course/community is for you!

Don’t forget to use your NEWYEAR coupon to get a £100.00 discount 🙂 Promo expires end of January.

Property partner rebrands to London House Exchange and adds liquidity

In other investing news, I noticed that Property Partner rebranded to London House Exchange just now.

I’m still down -7% since my original investment in property partner in 2018. That’s partly due to my decision to invest a good chunk of it into student accommodation and partly due to big discounts on the platform. Investors want out.

As I described in 2021, Covid hit student accommodation hard. It goes to show how much some of these PBSA properties have dropped.

London House Exchange have now added another metric, the Vacant Property Value.

From their definition:

Vacant Possession Value (VPV): assumes each unit within a residential block is sold individually, with vacant possession (i.e. no tenant in place)

For example, if you own a block of flats valued at £1m, you can get better outcomes by selling units one by one. Which can result in a higher return.

The vacant possession value should better reflect the portfolio value, in theory. That’s because selling individual units in a block is the strategy Property Partner follows when ‘exiting’ an investment.

And in practice, if we look at the actual selling record, the Sales price matches the Vacant Possession Value.

According to that metric, I’m not down -7% but up 1.5%. These include dividends and are after fees.

VPV won’t apply to my student accommodation though, so I’m not fully benefitting from that.

Speaking of which, my property portfolio looks much nicer without the student accommodation… but that’s wishful thinking.

Time will tell which metric better reflects the money I’ll get. For now, I hold.

Liquidity in the secondary market

Even good Property Partner properties can trade at a discount to what they sell in the open market. Which sucks because imagine you have picked fantastic properties and are up 30%, but you cannot sell them.

So if you have a healthy portfolio and are sitting on gains, you cannot easily exit because there are not enough people willing to buy – or at least at the estimated price.

There are some positive signs on the horizon. Since the Property Partner acquisition by Better, the parent company will now fix the liquidity issues in the secondary market. Or at least try to.

They will buy 1% of all properties on the secondary market each month for three months. Retail investors can jump on the wagon, too, investing at a -25% average discount to the property values.

To do so, they offer a new investment plan somewhat close to what I would describe as a “property index fund”.

The all-Share Investment plan will target clients who can invest in a highly diversified portfolio with a focus on shares trading at a discount to property valuation.

You can view it here. Always do your own research.

Last but not least, they grew the PP team, which is a good sign for the platform.

To my surprise, Better also bought Trussle, the online mortgage comparison. You may have used one of those. I will try Trussle and Habito on my next remortgage.

Another area where software is eating the world.

Life Sciences and BioTech

Next week I will interview Andy Craig of How to Own the World book fame.

Andy is a repeating guest with whom I could talk for hours.

I know his background is in biotech businesses, and we briefly covered some of it last time (23:50).

This time I want to focus on this emerging trend and how life sciences will change the world around us.

Yes, of course, you can expect a discussion from an investor’s point of view since Andy is launching a new fund on the subject.

Are there any questions you’d like me to cover? Please give me some inspiration!

Other resources

I recently read the Price of Money book by Rob Dix.

Rob did an excellent job explaining how complex economics work, like quantitative easing, inflation and currency depreciation. The focus is to help the reader understand and potentially take advantage of the situation.

For such a dry subject, Rob’s writing, knowledge and humour delivered! It’s written from a UK investor’s point of view, which is always helpful and a bit rare.

A relevant book across the pond, a bit more advanced but dry, is the Pragmatic Capitalist by Cullen Roche.

I also finished watching the 4-episode Madoff documentary, “The Monster of Wall Street”, on Netflix.

A huge Ponzi scheme. Enough said!

Netflix did a good job describing the situation, interviewing real victims and showing what happened.

But I’m pretty sure that’s not even half the story. What they don’t say is what happened behind the scenes.

There are so many open questions:

• What was going on with so much money?
• Why were fund managers committing suicide or being killed?
• Was the SEC truly so blind?

I guess we’ll never find out.

Films like that make you question who you give your money to…

As always, thank you for reading and happy investing …carefully!

PS What do you think of my email approach to include the entire blog post in the newsletter? That’s different to my previous ones, where you only get a preview and a link.

If you are looking to invest your company cash, this post explains everything you need to know.

Does your UK limited company have surplus cash in the business?

What if you could invest the company cash and earn an extra income?

Taking more dividend income can be very costly and banks pay zero interest these days.

How much money do you lose to inflation each year?

An average UK inflation of 2.9% means that £100,000 will be worth £75,000 in 10 years time. A £25,000 loss!

Wouldn’t it be nice to invest through your UK limited company?

Also, most companies are trading entities with a clear purpose. What are the risks of investing the company money?

Good news!

In this blog post, we will cover:

Can I Invest my Company Cash?

Yes, you can invest your company cash.

Limited companies can invest the business cash in several ways such as:

• Stocks and Funds
• Property
• Pension contributions
• Crypto
• Gold
• High-yield savings account

After a certain income point, investing your company cash is better than taking dividends.

This is because you save on income tax until you really need the money.

Let me explain.

As a company owner, you likely pay yourself in the form of a small salary and more in dividends.

Up to a total £50,270 income, it’s usually better to take the money home. You can then invest at a personal level after paying for your living expenses.

But what if your company earns more than £50,270? This leaves surplus cash in the company.

As years go by, this lazy money stays idle losing purchasing power to inflation!

You can take more income (and pay more tax) or you can invest from your limited company.

But if you cross the £50,270 income (salary, dividends, etc) then the dividend tax is 32.5%! And that’s after having paid 19% corporation tax already.

That’s a lot of tax. And yes, there is an alternative!

Investing from a limited company can result in huge savings compared to investing personally.

Otherwise, you might be leaving a lot of money on the table. More on that later.

Where can I invest my company money?

Your limited company can invest in assets like stocks, funds, ETFs, property, crypto, bonds and more.

It can also make pension contributions and buy commercial real estate.

Here is a detailed list of what a limited company can invest in.

1 – Stocks and ETFs

Your limited company can have a corporate trading account. It can own public shares like Apple and Tesla, ETFs and mutual funds.

There are many brokers offering limited company trading accounts.

My favourite one is Interactive Brokers.

IB is well-known, trustworthy and well priced. Read my Interactive Brokers guide for limited companies.

It should save you some time researching and signing up.

If you want to learn more about stocks and shares I recommend Tim Hale’s book Smarter investing.

Index funds are the pillar of my investing strategy and have worked very well so far.

2 – Buy-to-let Property or Commercial Property

Your company can invest in property. Owning real estate is a very profitable way to invest here in the UK.

A company can buy a flat or a house for investment purposes. You will collect rent while the property appreciates in value.

Note there are 2 challenges when investing in property through a limited company:

1. Buy-to-let mortgages are more expensive
2. Lenders want to see a separate company vehicle for this purpose

A Special Purpose Vehicle (SPV) is exactly that.

What is an SPV?

An SPV is a limited company whose sole purpose is to hold a property unit or a block of units.

Your company can lend money to an SPV which buys the property, as we will see shortly.

It keeps a tidy book which is what lenders want to see before giving you a mortgage.

Property can offer good cash flow if you can find an attractive investment.

Your company can also make property loans to developers and earn interest on the loan. Yields are 8-12% per year depending on the platform.

3 – Pension contributions

If you don’t make pension contributions from your company, you should definitely consider it.

Your company can pay into a director’s pension that grows tax-free. This is called an employer contribution.

The best part is that the money going into the pension is not taxed by corporation tax. It’s a win-win situation for both the company and yourself and a great way to secure your financial future.

A pension is much better than an ISA for limited company directors as the graph below shows:

Pensions are great but they are not accessible until pension age (57 years old from 2027).

Your limited company cannot invest in an ISA. You first need to take an income.

It might be better to split your company cash between pension and company investing.

Company investing is a good way to bridge the gap until the pension age.

In the meantime, you can access the limited company funds at any time without relying on future pension rules.

4 – Crypto such as Bitcoin

Your UK limited company can invest in cryptocurrencies like Bitcoin and Ethereum.

Love it or hate it, cryptos have made some people extremely rich and looks like they are here to stay.

To buy crypto from your limited company you need to sign up for an exchange offering a corporate account.

Some of them do, but the real challenge is finding a bank that allows the transfer to an exchange.

Gemini and Kraken are exchanges offering corporate accounts. Binance is great for trading if you can deposit crypto to it but has stopped accepting GBP transfers.

There are not many crypto-friendly banks, but Revolut, NatWest and Mettle rank higher on that list.

How much crypto should you own? Cathie Wood suggests a crypto allocation range of 2.8% (minimum volatility) to 6% (maximum returns).

5 – Private investments

Not all markets are public. Your company can own a stake in another company.

You might find such deals in your private network if a startup needs funding.

There are also platforms that offer private investments to limited companies such as Crowdcube and Seedrs.

6 – High-yield savings accounts (3-5%)

Thanks to the high-interest rates, cash can pay a high interest these days. Limited companies can hold cash in a high-yield savings account and earn 3-5% interest per year.

This is great. Other options include Money market funds, short-term bonds, or even ultrashort corporate bonds.

Check out the cash article above.

Now you might be wondering.

What are the risks of investing from my limited company?

If my company sells goods or services, can it do something completely different? Let’s find out.

Risks of investing from your limited company

It is definitely legal to invest from your limited company.

Most limited companies have a ‘trade’, selling goods or services.

For example, you might be an IT contractor or a doctor with surplus company funds.

Can your trading company make investments?

Yes, your trading company is allowed to make investments.

Investing directly from your trading company is cheaper, straightforward and simple. But this might not be the best way to do it.

It all depends on your goals and your setup.

These are the three reasons a trading company should not make investments directly:

1. Risk of your company classified as a “Close Investment Holding Company”
2. Legal separation between trading and investing
3. Easier for tax purposes

1 – Risk of your company classified as a “Close Investment Holding Company”

This means 2 things. 

i) Your Entrepreneur’s Relief is at risk. Investment companies cannot claim Entrepreneur’s relief. You cannot close down the company and pay only a 10% capital gains tax. You can, yet, close it down and pay 20% tax.
ii) The Corporation tax will go up to 25% in 2023. Read the updated Corporation tax guide for 2023 onwards.

Companies with less than £50,000 in profits will get a ‘small profits relief’ rate. This keeps the corporation tax at 19%.

But investment companies do not get the same treatment regardless of profit size. So your trading/investment company will pay 25% corporation tax.

2 – Legal Separation

If one company is in trouble, this should not spill over to your investments.

A buy-to-let mortgage, for example, should not put your trading company at risk.

3 – Easier for tax purposes

Separating the trading from the investing activities makes it easier for accounting.

The investment company is simpler and does not have any payroll or VAT obligations.

In the next section, we will see the different ways a limited company can structure its investments to overcome those problems.

How to Invest my Company’s Surplus Cash

In this section, we will introduce two ways of investing your limited company’s surplus cash.

There are 2 tax structures that allow you to invest your company cash:

1. Open a parent (holding) company and form a group structure
2. Open a separate investment entity and make a loan to it

In both cases, you separate the trading from the investment activities.

The choice depends on your time horizon and your goals.

Option 1: Form a holding company group

In the holding company model, you open up a new company that owns your trading company.

The trading company transfers money up to the parent company in the form of dividends.

These dividends are between companies and in the UK, they are tax-free.

Your holding company can then make investments in several assets or start new subsidiaries.

The benefits of the group structure are:

• Assets ring-fencing (including intellectual property, computer equipment, cash etc)
• Can make the trading company more attractive for a sale
• Synergies between one or more companies within the group
• Better family tax planning and dividends distribution
• Inheritance (estate) planning

Option 2: Loan to an investment company

In the company loan scenario, you need to form a new limited company and make a loan to it from your trading company.

These are 2 separate legal entities and the loan needs to be under commercial terms. This means you need to charge interest on the loan.

The interest payment is not a dealbreaker since the net effect is zero!

This is because the trading company treats it as profit but the investment company treats it as a loss.

Generally speaking, the loan option is a quicker, easier to set up structure. It is suited for more short-term projects.

Choosing a tax structure is not easy. It’s one of the things you need to consider before investing your company cash.

This is why we have built a Company Investing Course and a powerful community.

The course includes tax and investing information as well as a Q&A with a Chartered Accountant.

If you are a business owner, you will find it incredibly valuable. Join us!

Is Company Investing Worth It?

As a company director, you should always take the first £50,270 of income.

This is the basic rate tax threshold. The income tax to pay is only £2,677.

But what if your company makes more? One option is to put some money in a pension.

But we lose access to it and we can only put so much into a pension.

So most people take the easy path of taking more dividends. Although this is convenient, it is also so costly! People pay so much in the name of convenience.

As an example, a £60,000 surplus cash would cost you £250,000 more in dividends tax over a 10 year period!

Don’t believe me?

Let’s compare taking extra dividends (32.5%) versus company investing.

Assume a £60k company surplus each year and 7% returns for both the company and personal investors.

As you can see, avoiding the upfront dividend tax gives us a nice £252,000 advantage. That’s even after paying the corporation tax on the company profits.

Copy my online Excel document (File -> Make a copy) and play with your own numbers.

At the end of the 10-year period, we can take an income from a much bigger pot. We can withdraw as much as we need, pay family members or invest in other business opportunities.

Speaking of family planning and inheritance tax optimisation, Finumus has written a great FAQ post on Monevator about family investment companies.

Overall, we saw why investing your company cash is so much better than taking profits. It’s also the reason most rich people operate through limited companies.

Final thoughts

UK businesses can invest their company cash and build real wealth. Your business can contribute to a pension, buy property, invest in shares etc.

This presents some risks to the trading business.

It is better to separate trading from investing activity for various reasons. We showed two different tax structures to do that.

Lots to consider but there’s real money to be made. It’s time to beat inflation and put the business cash to work.

Do you know a company owner with surplus funds? Share this post with them!

I opened an account with IB after a lot of readers pointed out the platform benefits to me. Interactive Brokers are a well-known American firm that now operate in the UK too. I like the transparency and the fact that they’re listed on the stock exchange (NASDAQ: IBKR).

Companies that trade publicly means higher regulation and better protection to us, the customers. Customer money sits in a segregated account, as expected. Read more about how investors are protected here.

In another article, I showed how to invest your company cash. A lot of people have done so through different brokers. I initially trusted Interactive Investors for my funds, but I have now switched to Interactive Brokers which is a low cost and trustworthy broker, in my opinion. Things I’m looking for in an investment platform are:

• Low cost
• Decent customer service
• Solid coverage of the ETF universe
• Strong reputation
• Support for Limited Company accounts

It’s worth noting that Interactive Brokers only offer a limited selection of mutual funds for non-US investors. Initially, I thought this is a blocker, but then I remembered most of the index funds can be replaced with their ETF counterpart (or similar). They offer a huge selection of ETFs including those domiciled in the UK, US, Luxembourg, Ireland etc.

For example, Vanguard’s World VWRL ETF is a global stock market ETF. Then ETFs are great because they can be traded instantly, have tax advantages and are low cost too. So that’s covered for me.

Interactive Brokers are an advanced platform for professional traders. They offer stocks, ETFs, CFDs, Metals, Options, Futures and Forex among other options.

For example, a major feature that took my attention is margin trading. This means you borrow money to invest. You pay some margin fees and have the option to invest more than you can.

They also offer a nice API if you want to do some algorithmic trading.

However, this does not mean IB cannot serve someone like myself – looking for a simple solution who just wants to invest 5-6 times throughout a year in a few tracker funds. I just like to keep it simple, but there are plenty of options to make it complex if that’s what you want.

Fees – Pricing

I’m not going to explain the whole range of fees as this depends on the country, order value, type of product etc. But I’m going to give you a brief overview of a small business account that places a few trades each year into stocks & ETFs in the UK which is one typical use case.

Interactive Brokers is really cheap compared to other brokers. They have both fixed fees and tiered solutions. You can choose which one you want to use.

ETFs and Stocks (Fixed fee)

Up to £50,000 GBP trade value – £6.00 per order

Then depending on the activity of the account, you pay a small fee if you don’t generate enough commissions.

Monthly Activity Fee = 0 if monthly commissions are equal to or greater than USD 10. (or currency equivalent)
If monthly commissions are less than USD 10,
Standard Activity Fee = USD 10 – commissions.

So for an account that places one ETF trade a month, the annual total charge would be
Trade commissions: £6.00 * 12 months = £72.00
Inactivity fee = (£10.00 – £6.00) * 12 months = £48.00
Total annual fee = £120.00

In my experience, this is a very low commission for a corporate account.

ETFs and Stocks (Tiered fee)

The IB pricing structure pleasantly surprised me. Their tiered trading fee starts from 0.050%, min £1.00 per trade for up to £40 million monthly trading volume.

The tiered fee is a great solution for those that want to place small trades a few times per month. Basically the break-even point is an average of £12,000 per trade above which it’s probably worth paying a fixed fee instead.

So a trade of £10,000 at 0.050% will cost £5.00. Even better, a trade of £1,000 will cost only £1. This is amazingly low. Sure you still have to pay a monthly activity fee but still. Assuming you place 10 x £1,000.00 trades each month, so in 12 months that’s 120 trades.

Total annual cost = £120.00.

I cannot stress how low this is compared to the typical £12.50 per trade of other brokers. Other brokers would charge £1,500 per year in trade expenses alone for a similar scenario.

How to open an Interactive Brokers limited company investment account

Opening a UK limited company account is not the easiest task but it’s all online and certainly doable if you have all the documents. You will need to fill in certain company and personal information and upload some documents to verify your details.

I won’t go into details of each and every screen, because most of them are straightforward. I’ll only explain the bits I found tricky.

There are 3 types of accounts for small businesses:

• Cash account
• Margin account
• Portfolio Margin account

The main difference between Cash and the other two types of accounts are the ability to trade on margin. This means you can trade with borrowed funds. It also means you can lose more than your initial investment so beware.

Margin account requirements are rules-based whereas Portfolio Margin account requirements are risk-based according to the positions in your portfolio.

I opted for a Margin account. I do not plan to trade on margin anytime soon but would like the option to be able to do so in the future. Read this document from IB that explains what the margin benefits are along with their requirements.

Note: You can upgrade your Cash account to a Margin account later.

My company is just a vehicle for me to invest in stocks, shares and property. It does not really trade, but invest for the long term. This may or may not be the case for you.

The trickiest part of the application will probably be the one where you select your FATCA status. Luckily for me, I had to do it again for Vanguard in the past, therefore I was familiar with it. But it can be very confusing for people and brokers are not able to help either.

How to determine your FATCA status

The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law requiring all non-U.S. foreign financial institutions (FFIs) to search their records for customers with indicia of a connection to the U.S., including indications in records of birth or prior residency in the U.S., or the like, and to report the assets and identities of such persons to the U.S. Department of the Treasury.
Source: Wikipedia

If you’re a UK-based LTD company you’re probably either an Active or a Passive Non-Financial Foreign Entity (NFFE), unless you’re a bank, pension trust or a public company. What “Foreign” really means is foreign from a US standpoint, as this is a US legislation.

From the IRS instructions (w8ben-e form), an Active NFFE is one that:
• Less than 50% of such entity’s gross income for the preceding calendar year is passive income; and
• Less than 50% of the assets held by such entity are assets that produce or are held for the production of passive income (calculated as a weighted average of the percentage of passive assets measured quarterly)

I’ve stumbled upon a very helpful FATCA decision tree by OneAccount and here’s its glossary. And here’s the long HMRC guidance notes PDF, if you want to kill some time.

My company is a Passive NFFE but that may not be the case for you. If you invest through the company you also trade with, this may not be the case for example. Or if you use your investment company to buy and sell regularly (trading).

Again, I’m not sure about this and you’ll be better off calling HMRC (0300 200 3500) to double-check your company is a passive or active NFFE. And as always, seek professional advice.

How to complete the W8-BEN-E Form for a UK investment company

This is another step in the process. Interactive Brokers will give you a W8-BEN-E form for you to fill out online. The W8-BEN-E form is the equivalent of the W8-BEN form but for corporations. This tells IRS that they should only withhold 15% tax off your dividends rather than 30% thanks to the USA-UK tax treaty. If you have an ISA and invest in US companies, you’ve probably completed one already.

I’ve ticked Part I (1,2,4, 5 – Passive NFFE, 6, 9b – that’s your corp tax UTR), Part III (yes, 14a, 14b – Company that meets the ownership and base erosion test – see IRS instructions), Part XXVI (ticked 40a, 40b).

I can always electronically submit a new WB-BEN-E form if my circumstances change. On the Classic AM interface, it’s under Manage Account -> Account Information -> Tax Information -> Tax Forms.

Sources:

• W8-BEN-E IRS instructions
• Gov.uk: USA Tax treaties
• Accounting Web forum thread

Documents upload

The most time-consuming step of the onboarding application is the Documents Upload screen. Click on the More Information links to find out what each one means.

It takes time to download, sign and upload lots of forms. But the good thing is that you can download all of them locally, and use Adobe PDF reader to Fill & Sign. You don’t really need to print it and send letters, unlike other brokers.

The documents you will usually need are:

• Business Bank statement
• Certificate of incorporation (you can find this on Companies House)
• Personal ID (passport, driver’s license)
• Proof of address (utility bill)
• A few forms from “More Information” you need to download and sign

I only uploaded a few documents and left it incomplete for the night. The next day I received an e-mail from the New Accounts department asking me for a few more details including the Source of Funds. This was a good sign of customer service. I provided all remaining details and they opened my account the same day.

After signing up, you will be asked to electronically submit your EMIR and MiFir preferences. These are regulations for the derivatives markets. I do not trade derivatives and therefore these don’t apply to me. However, if you do, you may be subject to these regulations.

If you want to ask any questions during onboarding, a useful e-mail is onboarding@interactivebrokers.com.

Customer Service

The customer service has been pretty good so far. My account got locked after a few unsuccessful attempts to log in. I called them up and despite the late hours, they resolved it within minutes. I had to wait for less than a minute in the queue before a lady with a nice American accent picked up the phone. She was quite helpful and reset my password very quickly.

The customer service via e-mail was also decent. I had only uploaded a few documents during my onboarding. The next day I received an e-mail confirming that my documents were OK and the remaining documents they need from me to continue processing my application.

They have a live chat, a UK phone number, e-mail and a FAQ page.

Placing Orders on the Interactive Brokers platform

Personally, I like simple investing interfaces because I am a boring buy-and-hold passive investor. If I were a trader, the Interactive Brokers interface would be very appealing to me.

There are different ways to place an order, but I went for the QuickTrade online solution. As the name suggests, you can buy and sell any security at Market or Limit price and get on with life. Here’s how the interface looks like:

If you want more advanced features, then you can download the Trader Workstation which is a desktop application.

The Mutual fund – ETF replicator is another interesting tool this interface provides. Say you have an expensive mutual fund that you want to know what the alternatives are. This tool will show you what the closest options are in ETF flavour and at a lower cost.

Summary: Interactive Brokers Company Account

Interactive Brokers are a great platform for UK Limited companies wanting to invest their funds. It provides a wide selection of ETFs and other securities such as Options and Futures.

The ability to trade on margin should be carefully considered. It can go both ways…

The onboarding process is not the easiest, but it reflects the level of checks they need to perform to make sure they only have legit customers. On the plus side, you can do all of it online.

Interactive brokers are a public company. This comes with both heavy regulation and transparency (both good for us).

I did my best to cover the Interactive Brokers platform for UK companies wanting to invest. But what applies to me may not apply to you. Also, the information in this article may be inaccurate by the time you read this. I did not consider your tax or financial situation.

For a thorough review of investment platforms for UK limited companies have a look at the Company Investing Academy. This includes everything business owners should know to generate an income from their hard-earned company cash.

This article should not be considered tax or financial advice. Always seek professional advice. I am not liable for any damage or losses. Foxy Monkey does not accept any liability for any loss or damage which is incurred from you acting or not acting as a result of reading this publication. You acknowledge that you use the information we provide at your own risk.

Interactive Brokers have not paid me to write this guide.

Do you have money sitting in your business account? Would you like to invest your company’s leftover cash?

I have many friends who own small limited companies or are self-employed. The pattern usually goes like this: The business is profitable and starts generating some cash.  The business owner takes income plus dividends up to a point that is tax-efficient, usually around £50,000.

People cannot use the business cash remains without paying a huge tax bill and cannot expense it either because business expenses is a sensitive area only used for business purposes. As a result, the company profits stack up and a large amount of cash is sitting “locked in” in the business account.

I was in the same boat and I knew I was missing out. If you have a look at the UK inflation data (2.9% at the point of writing), cash is losing its purchasing power. In plain English, your cash can buy less stuff than today in a few years time.

My £10,000 will be worth £7,500 in 10 years time. So doing nothing was really not an option! Similarly, £100,000 will be worth £75,000. A £25,000 loss!

Having asked around in the community, it looks like people either do nothing or just take a big tax hit by withdrawing their profits. After researching all the options, it looks like there is a better way. In other words, investing through a limited company and not taking the money out until really needed. But, what’s better?

Take the money out and then invest or invest through a limited company?

In both cases, taking the first £50k or so almost tax-free makes sense. But what about the cash surplus?

Obviously, if you need the money for personal reasons (e.g. buy a house) there is no question. You just need to take everything out and take the tax hit upfront.

But for those (including myself) who want to put the money to work for them let’s dive into the math and decide.

To take the money out we would have to pay 32.5% dividend tax upfront. That’s a lot, but our money would then grow tax-free thanks to ISAs and other allowances. This is not always the case but let’s assume you and your partner have a £50k tax-free allowance.

Copy my online Excel document (File -> Make a copy) and play with the numbers. As you can see, not paying the tax upfront gives us a nice £252,000 advantage compared to tax-free personal investments, even after paying the corporation tax on the profits.

At the end of the 10 year period, we can either take everything out of the company or we can simply withdraw as much as we need and pay much lower taxes.

You wouldn’t want to pay £289,900 (32.5%) dividend tax to take £892,000 out, so why do it incrementally over 10 years? The numbers stack up.

It looks like keeping the money in the company and accessing it only when needed is a much more profitable strategy. Even more importantly, if you stop working at some point and achieve financial independence. Isn’t this everyone’s goal…?

How to Invest your Company Money

There are two ways that you can invest via a limited company. Let’s say you are an IT consultant operating via your limited company: “Tech Guru Ltd”.

• Option 1: A holding company (ie “Tech Guru Holdings”) owns your “Tech Guru Ltd” trading company and receives the cash surplus as dividends.
• Option 2: You open a totally separate company and receive the money as a loan from “Tech Guru Ltd”.

The option depends on your time horizon and your goals. Generally speaking, having 2 companies as separate entities is a quicker, more short-term structure and easier to set up.

I, therefore, chose option 2 and decided I’m going for a commercial-rate loan in a timescale to be agreed. I documented the loan agreement in a signed letter from the trading to the investment company and I make regular bank transfers while keeping track of the money flow. There is no obligation to pay back the loan and I’m the sole director of both companies.

You may want to make it more formal by having the borrower pay a small interest to the lender.

If you invest via another limited company the trading company has better chances of qualifying for Entrepreneur’s Relief as long as the loan is repaid in full.

Entrepreneur’s relief means that in case you want to close down or sell your business you’ll only pay 10% capital gains tax on the gains. See also – Can I claim Entrepreneur’s Relief if my Company Invests?

Why not invest the money from your trading company directly?

Three reasons.

1. The trading company should not get caught up in ‘non-core’ activities. There is a risk of your trading company being classified as a close investment holding company which has tax implications. Your trading company should trade only in its relevant sector. In our case, “Tech Guru Ltd” can build websites, provide hosting, etc but should not start buying buy-to-let flats.
2. Legal separation: If there’s trouble in one company, your other company will not be affected in legal terms.
3. Easier for tax purposes: The investment company will not have any payroll, VAT obligations etc.

In both cases, you need to open a new company. That’s actually quite easy and the Gov.uk website does a great job at explaining the process.

I opened mine online which costs £13 and only spent 30 minutes because I wanted to be super careful. You need to appoint a director (yourself), have a registered UK address and allocate one £1 share to yourself.

Note that you will need to provide a list of SIC codes, which technically defines the nature of your business. There are no fixed rules for what your SIC codes should be. Just focus on finding the SIC code(s) that best describes your investment activities.

Because I invest in shares and bonds, and I may invest in property too, I selected the following SIC codes:

64991 – Security dealing on own account
68100 – Buying and selling of own real estate

It’s better to set up a special property vehicle (SPV) if you want to invest in property. This is essentially another company that only invests in property. This way it’s easier for the underwriter to give you a buy-to-let company mortgage.

Can you invest business profits to avoid taxes?

People think that by investing the business profits you can save on taxes. Well, not so fast. The trading company must still pay the corporation tax each tax year. In other words, investing does not reduce the corporation tax bill from trading activities.

However, the main benefit is that the directors make a big saving on the income tax. That’s because the money does not yet leave the company which would otherwise trigger extra income tax.

Let’s not also forget that investing might bring profits and these are taxable as well. However, that’s only if those gains are realised. In other words, in the stocks & shares world, if you “buy and hold” a fund but never sell, you don’t have to pay anything even if the fund price keeps increasing every year. You only make a gain when you sell at a profit.

Dividends received at the company level are exempt from corporation tax (HMRC link). That’s as long as the location of the fund/shares is in the UK or in one of this long country list. This is great and an added benefit! The reason behind this is that dividends have already been taxed at the company which distributes them.

Non-dividend income, rent from property, for example, is subject to corporation tax the year it’s received.

Disclaimer: This is not tax advice. Ask for tax advice before you proceed!

What should I do with business profits?

The answer is simple: Invest in income-producing assets like stocks, property and bonds. Consider re-investing some profits into your business too if possible.

That’s a complicated topic because different people have different tolerance to risk, different goals and taste.

Have a look at my investing category for inspiration. A great book on the subject is called Smarter Investing by Tim Hale. It’s probably the only book you need to read to start investing wisely.

My personal preference is broad low-cost index funds. By owning the whole market you avoid sudden shocks of one or two stocks dropping in value and wiping out our profits. Not to mention I don’t have the skills to research a company better than the quant experts employed at the Wall St.

So by owning everything, I capture the whole market return and spread my risks across different companies and countries.

Stock market Index funds

My favourite investment provider is Vanguard who set the foundation of the passive investment industry. They have products that allow you to own a small percentage of every company in the world, thus owning the whole market.

Vanguard Lifestrategy 60% equities, 40% bonds is a global balanced portfolio with a very low fee of 0.22%. You can invest with Vanguard directly but the minimum investment is £100,000.

My investing experience with Vanguard has been very smooth so far and the customer service is excellent. To open an account, you need to fill out a form. Then you can start investing right away.

If you feel more adventurous and want higher returns, just tilt the equity part of the portfolio and go for 80% stocks. If you want a smoother journey instead, go for 60% or even 80% bonds.

The only drawback is that Vanguard don’t offer an online platform to buy, sell and view your investments online. Although in the beginning, it was frustrating, I now find it positive as it keeps me from checking my accounts every day and make bad investment decisions based on what the news said today.

Note: If you want to invest directly with Vanguard, call them on 0800 408 2065. The UK-focused vanguardinvestor.co.uk website doesn’t advertise business accounts just yet.

Alternatively, you can go via a broker and pay a platform fee for using them.

UPDATE 2020: Interactive Brokers offer a corporate account. It costs nothing to open and they recently removed their monthly inactivity fee. Interactive Brokers don’t have the £100,000 minimum requirement Vanguard has.

Read how to open a limited company investment account with Interactive Brokers.

Property

Your company can invest in a buy-to-let property. Bricks and mortar is another classic way to invest here in the UK.

A company can purchase flats and houses for investment purposes and rent them out. Interest rates are usually higher for limited companies compared to personal mortgages and lending criteria are tighter.

But if you can find good opportunities then it’s worth looking into property investment. Check out the Rob & Rob property podcast if you want a good resource.

Although I’m not investing in traditional buy-to-let directly, I am investing in property via Property Partner.

I think Property Partner strikes a nice balance between stock-like REITs and traditional Buy to Let. REITs provide exposure to property but exhibit stock-like behaviour. So when the stock market falls, the correlation is very high.

Buy-to-let, on the other hand, provides some very nice rewards in terms of returns. However, it involves a lot of hassle to find a good deal, requires a high initial capital and it’s highly illiquid. The other disadvantage I see is that you cannot diversify and spread the risk in 5 cities unless you have a very high initial capital.

Property Partner is a platform I’m investing through that allows you to own part of a property, collect the rent and have it professionally managed. I like the idea, it’s been running since 2013 and it’s easy to register as a limited company.

So far, the returns have been 5.2% a year.

And here’s my experiment investing £50,000 over the next 5 years (starting 2018). I also met the team and started building a trust relationship.

The Property Partner Experiment – Q4 2018

A little hack: Since I’m investing in Property Partner as a limited company, the rent I receive in the form of dividends is tax-free! That’s because dividends received in an investment company are not taxed again. They have already been taxed at source.

Peer to Peer Lending

An LTD company can invest in peer-to-peer loans. They offer lucrative returns for lending cash to other people and businesses. I’ve written a Zopa review for investors you may want to read.

TL;DR: Returns of around 5%, hands-off automatic investment, loan length of up to 5 years.

The sign-up process is pretty straightforward as they need your business details, the director details and your money. As always, do your own research.

Have you forgotten the pension?

If you don’t pay yourself a pension then it’s definitely worth considering this option. Your company should pay a pension into a SIPP pot that grows tax-free.

The best part is that the money going into the pension is not taxed by corporation tax. It’s a win-win situation for both the company and yourself and a great way to secure your financial future.

You need to find the right balance between pension contributions and LTD company investments though. That’s in order to maximise tax breaks while ensuring you can access some of your money before the pension age.

How to find a good accountant for Limited Company Investing

I had trouble finding a good accountant that can implement one of these strategies and answer my questions.

The truth is that not many people invest (outside their pensions) and even fewer have their company money working for them. This is why there is less demand for accountants who manage company investments.

If you just want an accountant, please send me an e-mail at “michael at foxymonkey dot com” and I can connect you with one.

In my experience, finding an accountant is only half the battle. It’s why I built the limited company investment course to take care of everything a company director needs to know before investing the company profits (including how to find a decent accountant).

• Which investment platforms are best for company owners based on their experience/needs and sign-up tips
• How to easily track your ongoing investments and tax obligations
• Different exit strategies 5-10 years down the line
• Property + HMO investing through an LTD
• How different assets are taxed when investing through a limited company (not just what the final tax bill is)
• How to actually choose a decent accountant for an investment LTD company
• An online community of like-minded business owners/investors to discuss ideas and strategies
• Which bank accounts to (not) use
• Pros and cons of Pensions vs LTD company investing and how to balance between the two to maximise profits as well as tax breaks
• Bonus resources such as videos, excel spreadsheets and reading material to succeed in investing

You can register your interest for the course here. I respect everyone’s privacy. Your e-mail will not be used for any other purpose.

Final thoughts

I have been investing as a limited company for 5 years now and I’m updating this guide with new findings over time. On one hand, company investment gains are taxed by corporation tax, but at the same time, you invest a larger pot if you don’t take dividends out. It really makes a big difference.

An added benefit of investing via a limited company is that the dividends received from stocks & shares and property partner are exempt from corporation tax. That’s a big plus.

Investing through a limited company requires a bit more upfront work to set it up. That’s because you need to open a new company and a new business account, find an accountant, keep track of the loans etc. Nevertheless, this can be a much more profitable strategy to build your wealth and use it while travelling the world, raising kids, you name it!

Want to read more? Visit The Company Hub, which lists all resources for limited company investing.

What keeps you from investing through a limited company? Or are you not investing at all? Let me know in the comments.

This article was last updated in January 2023.

See also: Can I invest my business cash?

I also provide a free corporation tax calculator for 2023. You can estimate your company taxes depending on the number of companies you own.

Corporation tax is easy to grasp. Understand it well enough, and you can help your business grow faster.

Main points:

• Corporation tax will be 25% in 2023
• Small businesses will pay corporation tax between 19-25%
• The more small companies you own, the lower the benefits
• You can reduce your corporation tax by taking action

Let’s dive in and first look at how corporation tax works.

How Corporation Tax is Calculated

Corporation tax is the tax businesses pay on their annual profits.

The corporation tax is calculated using the following formula:

Corporation tax = Profits * Corporation tax rate (%)

For example, if your profits are £50,000, at a tax rate of 19%, your corporation tax would be:

Corporation tax = £50,000 * 19/100 = £9,500

Your Corporation tax return covers your company year (known as the company’s accounting period), not a calendar year or April tax year.

For example, your company’s accounting year might be January to January, which is different from your personal tax year, which is always April 6th to April 5th.

What are Profits in the corporation tax calculation?

A business makes money by selling goods or services or by making investments.

The profits you pay corporation tax are after deducting expenses, bills and other outgoings.

Let’s see an example.

The Greatest Biscuits Ltd might sell £300,000 worth of biscuits a year.

But it also has costs.

It might spend money on rent, bills, paying employees and buying the ingredients. Let’s say these expenses amount to £250,000 in total.

Therefore, if we deduct the expenses from the gross profits, our Biscuit company ends up with £50,000 in taxable profits.

Then corporation tax applies on the taxable profits, hence the 19% on £50,000 = £9,500 corporation tax.

Often a business will decide to spend more money to grow instead of handing it over to HMRC. For example, it might open another biscuit branch, hire more people etc.

This would save corporation tax and effectively trade more money now for higher profits in the future.

Note that corporation tax is only on profits! So if your business makes no money, there is no tax to pay.

What will the corporation tax be in 2023?

The corporation tax will be 25% from April 2023. It is currently 19%.

But there is some good news for small businesses.

If your business makes less than £50,000 in profits in a year, it will pay 19% corporation tax.

This lower tax rate is known as the Small Profits Rate.

Up to £250,000 yearly profits, businesses will pay a tax rate somewhere between 19 to 25%.

If your business makes less than £250,000 in taxable profits, here is a quick way to calculate your corporation tax from April 2023:

To put it differently, the Small Profits Rate provides a maximum £3,000 corporation tax discount for small businesses each year.

19% instead of 25% on the first £50,000.

There are exceptions to these rates if you own more than one company. The limits are split between the associated companies you own.

Also, investment companies must pay 25% corporation tax and are not eligible for the Small Profits Rate.

Investment companies, however, typically defer taxes for much later in life if they don’t have to sell their investments early.

So yes, although the corporation tax rise is a headwind, it does not hurt investment companies to the same extent as trading companies.

Property buy-to-let companies can still benefit from the small profits rate. So property buy-to-let limited companies can still pay 19% corporation tax up to £50,000 in profits.

Not bad, dear landlords… Goes to show why so many BTL owners have used a limited company to invest in property.

Corporation Tax Calculator 2023

Here is a corporation tax calculator for 2023, which also takes into account the number of companies you own. Also known as Associated companies.

Simply enter your company profits, and it will calculate your corporation tax and your effective tax rate for each of your companies.

Use File -> Make a Copy to edit your own numbers. Check out the different tabs if you own more than one company.

These calculations are for trading companies. As I mentioned above, investment companies have to pay a flat 25% corporation tax and cannot benefit from the Small Profits Rate.

If you own one trading and one investment company, the spreadsheet will still work for your trading company taxes.

See the end of the article, which explains these special cases in more detail.

Corporation Tax Calculation Example 2023

Here is an example of how to calculate the corporation tax in 2023.

The Greatest Biscuits Ltd makes £100,000 of taxable profits.

Our biscuit business with £100,000 taxable profits would have to pay the following corporation tax:

19% * £50,000 + 26.5% * £50,000 = £22,750

So the total corporation tax is 22.75% for a business of 100,000.

Not as low as 19% but not as bad as 25%.

How can I pay less corporation tax?

You can pay less corporation tax by doing the following:

1. Make pension contributions
2. Increase your salary/employees’ salary
3. Claim all business expenses
4. Claim R&D relief
5. Expand your business (buy equipment, hire more people etc.)
6. Time your costs with profits
7. Claim work from home allowances
8. Carry loss forward to future years

Let’s visit some of them in more detail.

Salaries, pensions and business expenses

Expenses can dramatically reduce the corporation tax you pay.

You can deduct salaries and pensions from your profits as long as the compensation is for work you did for the business.

Here are some business expenses that can reduce your corporation tax:

• Accountancy fees, legal and solicitor fees
• Utility bills
• Office Supplies
• Office rent
• Materials to make your product
• Subcontractors
• Computer software, subscriptions
• Travel costs, car miles, bicycle miles

Many people operate one-man-band companies, such as IT contractors, doctors, plumbers etc.

You could add spouses to the company who can take on business tasks and get paid a salary. Even simple tasks such as admin can qualify for salary/pension.

Bigger businesses buy equipment, invest in another product line, hire people, or outsource tasks.

All these payments can grow future profits while lowering your corporation tax.

R&D relief on corporation tax for limited companies

Your company can get even greater tax relief if you’re doing research.

You can deduct an extra 130% of qualifying costs from the yearly profit, on top of the standard 100% deduction, to make a total 230% deduction!

Here’s what Gov UK say on the subject:

Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. You can even claim it on unsuccessful projects.

You can claim relief on salaries, software, materials and utilities. Ask your accountant if your project qualifies as research and development.

The tax treatment is attractive!

Corporation tax loss: The best thing that happened to limited companies

If you made a loss in the current year, you could carry it forward in future years. This is known as “tax loss carry forward”.

Carrying loss forward is excellent because it allows company owners to incur costs now without losing the ability to deduct them from future profits.

As a result, if you make profits in the future, they will only be subject to corporation tax once your tax loss is covered.

In a way, HMRC encourages risk-taking. Because, let’s face it, running a business comes with risks.

Reducing future taxes is beneficial to investment companies too.

You control where you place your investments but not how your assets will perform.

If your property loan defaults, you can offset it against investment profits and pay no corporation tax up to the loan amount.

Focus on growing your top line

Thanks to the Company Investing Course, I had the chance to interact with hundreds of business owners. Some turn over more than £1m a year in their businesses.

They all shared a common thought:

Michael, stop thinking about how to save tax but focus on how to grow your top line. This is what makes the difference in the long term.

They are right! Spending too much on taxes is time NOT spent growing your revenues and building products. Running a tight ship can only get you so far.

Remember to make money too!

How is corporation tax calculated if you own two or more companies?

The corporation tax is slightly different if you own more than one company.

The more companies you own, the less favourable the small profits rate becomes. 

This is known as the Associated company rule (see below).

You can just use the corporation tax calculator spreadsheet to estimate your corporation tax for two companies. But if you are curious about how the sausage is made, read below.

Corporation tax on two companies under common ownership

If you own two companies, your ‘small profits rate’ will be capped at a lower level.

Remember how you paid only 19% instead of 25% on the first £50,000 profits? If you own two companies, your 19% corporation tax will apply to each company’s first £25,000 profits, not £50,000.

This is to avoid gaming the system.

Because, in theory, you could spin up new companies and split profits between them to stay below the £50,000 level across all of them. But HMRC introduced the Associated Company rule to prevent corporation tax manipulation.

This table shows how corporation tax works on TWO companies under common ownership:

Corporation tax on investment companies

Investment companies must pay the full 25% corporation tax on taxable profits.

The Small Profits Rate applies to trading companies only. 

For example, if you operate a company that invests in ETFs, your corporation tax rate is 25% in 2023, regardless of how much you made.

As a result, mixing your trading business with investing is not a great idea. Now, even more so, because you risk applying the 25% corporation tax to your entire trading company’s profits.

Note that Property Buy-to-let companies can still benefit from low corporation tax. Those landlords still have it good!

Here are some frequently asked questions on corporation tax.

FAQ

I hope you enjoyed this corporation tax guide for 2023.

Feel free to use the bonus corporation tax calculator to estimate your 2023 company taxes. Remember, tax is only on profits. 

Remember to make money too! Thank you for reading.

There is no way to sugarcoat this.

The UK is in a recession, and taxes are going up, as we were promised.

Here are the updates Jeremy Hunt announced in the Autumn Statement 2022.

• A freeze on income tax thresholds
• Allowances frozen until 2028: Personal allowance (£12,500), NI, Inheritance tax, Pension allowances
• Capital gains tax allowance from £12,300, down to £6,000 from April 2023, and then halved again in April 2024.
• Dividend tax-free allowance drops from £2,000 to £1,000 in April 2023, and £500 in April 2024
• Lower threshold for additional rate taxpayers (45% tax) from £150,000 to £125,140. That’s £1,243 more tax per year
• The state pension, benefits and tax credits will rise in line with inflation – 10.1%
• The government’s energy price guarantee will be kept for a further 12 months at an average of £3,000 for a typical household, up from £2,500 at present.
• National Living Wage will increase from £9.50 an hour for over-23s to £10.42 from April
• Increased schools budget, with an extra £2.3bn a year and NHS by £3.3bn
• Energy firms will pay an expanded windfall tax of 35%, up from the 25% already levied on their profits
• R&D relief for SMEs cut to 86%, and the credit rate to 10%
• And electric vehicles will no longer be exempt from vehicle excise duty from April 2025

Even though Hunt didn’t rise the income tax, he did this in stealth mode by freezing the tax thresholds.

This means millions will pay more tax as wages rise to keep up with inflation.

In a 10% inflation environment, this will be the biggest blow to the average person.

Hunt also said the UK is in a recession. These measures will make it shallower and quicker. The Office of Budget Responsibility said that despite the new support with energy bills, living standards are going to fall by 7% over the next two years.

Inflation is expected to be 9.1% on average in 2022. It will go down to 7.x% in 2023.

On 23 September 2022, the government announced that the threshold for paying stamp duty would be raised from £125,000 to £250,000. For first-time buyers, this will increase from £300,000 to £425,000. It means that first-time buyers do not have to pay stamp duty if their home costs less than £425,000.

Stamp duty cuts will remain in place until 2025.

Dividend tax allowances are going down:

If you are a business owner, that’s 1,000 less tax-free next year.

If your dividends come from companies in an ISA or pension, then your dividends are tax-free anyway. But for most business owners and self-employed, this is another blow.

The dividend rates will remain the same. I am not sure if the 39.75% will kick in at 125k or at 150k as before.

Even though the dividend tax allowance will drop by £1,000, the rates are not going up. Speculation had it that dividends or capital gains tax rates would match income tax, but no. Not yet, at least!

Worth mentioning dividend tax is paid AFTER businesses have paid corporation tax on it.

Businesses will first pay 25% corp tax before the owner pays dividend tax. Increasing dividend taxes would disincentivise entrepreneurship even more, in my view.

Corporation tax

There was no mention of corporation tax during Hunt’s speech.

This is because it will go ahead as planned.

From April 2023, corporation tax will increase to 25%.

See this article to understand how corporation tax will work in 2023, with examples and a free calculator.

Businesses with profits less than £250,000 will pay lower corporation tax.

2.5 As previously confirmed, the planned increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go head. This will still be the lowest rate in the G7 ensuring the UK remains strongly competitive internationally. The Corporation Tax rise in April 2023 will only affect the most profitable companies because of the Small Profits Rate. The additional rate of income tax will now to be removed, and the basic rate of income tax will be maintained at 20%.

Full Autumn Statement Gov UK report

If your business profits are £50,000 or lower you will keep paying 19% (Small Profits Rate).

Businesses with profits between £50,000 – £250,000 will pay corporation tax somewhere between 19 to 25%, as I have previously explained here.

Working out the tax gets a bit tricky, especially if you own more than one company.

As successful business owners usually say: Focus on increasing your profits, not on taxes!

Additional rate taxes

Those with income higher than £100,000 were already heavily taxed. Personal allowance (£12,500) is reduced for any extra pound they earned after 100k. When the income reaches £125k, the allowance is completely lost.

This means the effective tax on income between £100 – £125k is 60%.

After £125,000, the income tax rate used to be 40%, and then 45% after 150k.

From April 2023, the 45% will apply from £125,140.

So if you earn more than £100k (gross), you will pay 60% (£100 – £125k), then 45% on £125,000+.

I still don’t get the 60% band in the middle but

Final notes

It was nice to see the national living wage increase by about 10% to £10.42 per hour.

This also comes after low earners had recently seen their National Insurance contributions zeroed up until the personal allowance threshold (£12,500). So that’s good.

If we are already in a recession, then the fact the labour market is still strong is a good sign.

I know it’s hard for everyone.

Things you can do to overcome the challenging situation:

• Try to stay employed / in business
• Become more valuable in your work – indispensable
• Increase your pension contributions (lowers your corp tax)
• Ask for a pay rise
• If you have a cash surplus, invest it to keep up with inflation
• Stay hopeful – 2024 is not (very) far, and the recovery will come
• Focus on the things you can control – spending, earning, side hustling, having fun, how you allocate your time

What have I missed? Keen to hear your thoughts on the Budget.

Stay positive! Thank you for reading.

Guest appearance on Rob’s podcast

I had a great time talking with Rob J, who runs the awesome Coffee & Coding podcast for freelancers and software engineers.

Here’s the link to the episode:

Building Wealth as a Software Developer (podcast episode)

In this episode, we discuss:

• Building wealth as a software developer
• Investment options for freelancers
• Putting your money to work for you
• How to get more out of your limited company
• and much more!