Dr James:
Fans of the Dennis who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dennis who Invest podcast episodes that really, really, really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me, what that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome, welcome to the Dennis who Invest podcast. Welcome back, everybody, to episode number 25, quarter of a century, everybody. I believe it’s called. We have another guest on with us tonight. His name is you may have seen him on the group his name is Zed Azmalie. He is a dentist. He wants to talk to us a little bit about how we can improve our finances, and I think it just resonates so much more when it comes from a dentist itself rather than somebody who is a financial advisor. And as well as that. You’ve kind of been through the process yourself, zed, in that you’ve invested your money by the science of it. It’s something that’s similar to what I do, so it’s pretty much by the book in that sense, in that it’s a lot of these established methods which can increase your money over time if you play it right and if you go into it with the right expectations. A lot of the stuff we’re going to talk about tonight we might retread all ground a little bit, but I think it’ll be worthwhile. We’re going to talk about stocks and shares, I says we’re going to talk about sips. They’re all on the agenda. It’ll be stuff we spoke a little bit about before. We might retread all ground in that sense, but there will be a lot of people out there who maybe haven’t seen the old episodes and haven’t heard it for the first time and, as well as that, it’ll resonate so much more when it comes from the myth of a dentist, of course. Zed, how are you this evening? Thanks so much for coming on the show.
Zaid:
Yeah, very well, thank you, James. I’m glad for being on. Thanks for having me on, and I feel like it’s the least I can do to pay back for the hard work that you’ve been putting into it as well. So, yeah, thanks for having me on.
Dr James:
Oh, my pleasure, mate, my pleasure, and to hear you say that makes me feel like I’m doing a good job at least no you definitely are. I’m engrossiated to you and I’m actually engrossiated to everybody that’s listening as well, because I just really didn’t think that this is going to get to the size that it was. That it has done it’s pretty crazy. It’s still sinking in. So thanks, everybody he’s listening. So, zed, I know that you do a little bit of investing for people who don’t necessarily know you on the group. Would you be happy to do a little bit of an intro and tell everyone who you are?
Zaid:
Yeah, sure, I’m a specialist of the long to stand in the Southeast. I graduated about 13 years ago now, which seems scary to say, but I, like probably most people part of your group, will listen to your podcasts. I mean, for the first 11, 12 years of my career I was completely financially illiterate. I had a set build I saw, put a bit of money in there. I wasn’t really paying attention to what I was doing and you know, every time I was involved in the stock market it was always the odd tip that you hear from a friend oh, you should invest in this. And every time I lost money on it. So that point I was like this is not for me. And then, yes, I set up an ISO about five, six years ago. I just randomly put it into Vanguard live strategy. I picked 60%. I didn’t actually know what the 60% meant. And then about a year or two years ago I looked at it. I thought, oh, that’s actually, it’s done, okay. And then a couple of years ago I received a big tax bill because I was over the annual allowance and that’s when I really started thinking about my finances and my situation and I had to really adjust pension side of things and potentially looked at incorporating, becoming a limited company, and that was one of the things, that which I mentioned in the group. You know, a few people are sort of in that situation. So I kind of want to talk a little about that. A little bit my view. But you know, once you start opting out of the pension, you’ve got to then take and charge your own affairs. And that was when I thought, well, if I’m going to do that, I’ve got to really read up about this. Essentially, this is my future and that’s what opened the door to this basically, and that’s how I kind of got into the whole thing and the last year, and so I’ve been reading a lot of books obviously, found out about the Facebook group and the podcast and listen to other podcasts and audiobooks and stuff, and I want to start listening to these things. A lot of things kind of get repeated it’s kind of the same things that you’re hearing over and again and just want to try and sort of put everything together and make it a bit relevant to dentists as well. Really.
Dr James:
Absolutely yeah, and I think that we could probably all stand to learn a lot, because you’ve kind of learned the hard way. You know, you’re from the School of Hard Knots. You’ve had this huge tax bill. I’m sure you can’t be alone in that and maybe that caused you to start thinking about how you can do this smart more cleverly and you are a dentist yourself, so you’ve learned this firsthand. So I’m sure there’s plenty of knowledge and information and things we stand to learn tonight. You mentioned well, we mentioned just before we were chatting off camera about financial independence. Can you just talk a little bit about what that means for?
Zaid:
you. Yeah, I think it’s getting to the point where you kind of work the hours you want to and essentially work whether you want to or not. So you’re doing it for the fun of working as opposed to doing it because you have to work to pay the bills. And I think the biggest thing from my side of things is that you know I’m an authentic, so I have patients that come in and if you can get into that position where you sometimes you could tell you’ve got a crazy patient coming in and you think, well, actually, if I can dodge seeing this patient and as opposed to think, oh, I should probably treat them because I need the income to cover this bill or whatever. So if you just have a, if your whole patientness is nice patients that you want to treat because you want to treat them, not because you need to get paid for it, that makes your life so much easier, makes your life so much more stressful, it makes you enjoy your dentistry, and then you can kind of pick and choose the hours that you work. If you get to the point in life where, like I said, you’re working only because you want to work as opposed to needing to work, and for some people that may be just when you get to retirement. You know, once you get to the point of retirement age of retirement, whether it’s 67 on the NHS pension or whether it’s 57, potentially earlier, or whether they’re trying to find a plan or work out actually, what age do I want to get to that the minute? Now we’re lucky enough to still be the point where I’ve got. You know, potentially 20 years away from that, what can I do to get myself at that level and how soon can I get there, and what changes do I need to do to be able to for me to do that?
Dr James:
Absolutely Well. Jazz made a really nice point on the previous podcast, which is that no matter how good a dense you are, there’s some absolutely phenomenal clinicians that I’ve seen. The work is incredible and it really does just take that one patient to really decide they don’t like you, and we all know that things are weighted in the notes is heavily in favour of the patient and they can make your life absolute hell, and there is that possibility that you can get struck off and remove from the register because of that, and it happens. You know it’s unlikely but it happens. And to be able to be a common theme on my page and a common theme what we talk about is diverse plan. So why not apply that logic to your skills and your fact? Well, you know what do you sustain yourself as well, and it’s just a really nice way of looking at it and maybe that just made me realise or maybe appreciate what I have, or financial independence, not going to have financial independence. So just maybe that I have something you know I’ve got my trade in on the side. It made me appreciate it from a whole new light and it sounds like maybe you have those thoughts similar as well.
Zaid:
Yeah, definitely. And as you know, without profession, you know our backs can go into very hard working. Every time I’m doing a bit of DIY always feel like if I slip or do something to my hands, I’m not going to be able to work. That’s always at the back of your back, of your head, so it’s just a bit of a point where you’ve got a backup. I think it’s really cute.
Dr James:
We’re self employed, aren’t we? And I know that there is a sickness cover and things like that, but it’s never quite the same if you can just sustain yourself out of something that is totally flexible and on your terms. And maybe, if you have you reached that, heralded, you know, pie in the sky, financial independence. I mean, wouldn’t that just be an incredible place to be to say, actually I’ve got no stress because I’m there already, you know and I like as well. Well it’s. I like to draw the distinction between financial independence and retirement, Because retirement has a certain connotation, doesn’t it? Yeah, that we’re old, we’re old cauders, I don’t know. I don’t mean to offend anybody who’s listening. I’m not saying I think that. I’m just saying that perhaps.
Zaid:
Your words, not mine.
Dr James:
Perhaps other people have said this. I personally don’t think that, but there is that connotation. So we say and financial independence and retirement. It’s just, it’s maybe a more poetic way of saying the same thing and it means that it is more accessible or resonates more with people of all ages. And why not aim for something like that, which is so magnificent and gives you the ultimate thing back, the ultimate thing that you possess, which is your time? But anyway, I’m not going to bang on too much. I’m not going to bang too much because this podcast is about Zed. Of course Zed we were also. I also wanted to ask you just the very, very fundamentals of starting to think about your money. A sip and an ice We’ve talked about these before in other episodes but, like I said, I just think it hits home so much more when it comes from a dentist dentist himself.
Zaid:
Yeah, I was going to talk a bit today about sort of ices and sips and what we need to do, and that’s what we need to achieve financial independence but also just kind of run through a little bit of a guide of everyone is going to be different ages in their career and give you an idea of what to do at sort of certain stages. But when you hear about all these investment opportunities or stuff like that, essentially to achieve our financial independence all you need really is an ice and a sip and and obviously, nhs pension. And the main difference in the ice and a sip essentially is just known as tax wrappers. So the main difference between them your isa is taxed on the way in, so the money that you’ve earned you’ve been taxed on you put that into your eyes, but subsequently doesn’t get taxed on the way out. So any money you make through your isa is completely tax free. So, which is, you know, a fantastic option that we’ve got here. We should take full advantage of it. And while a sip is untaxed on the way in, so it comes within certain connotations depending on your and your lungs, system positions and stuff, but generally it’s tax deductible from from it going in and but then it is taxed a little bit on the way out. But there are kind of some advances of having it in the sense that by the time you get to 57 you can take it. You can take 25% of that as a complete tax free lump sum. So for me I’m using that in a sense that initially I thought I’ve got to just try and get one more good, just quickly as I can. But the minute with mortgage rates being so low, you know, take advantage of that. You know one and a half 1%, one and a half percent of mortgage rate, you can easily invest and get more than that. And then you can use that 25% lump sum of your, of your sip, to pay off your mortgage when you get to 57. And so you want to be financially independent, financially independent, have no mortgage and just having the only bills that you really need just to cover your day to day spending, and so that’s a little bit of stuff which I’ll talk about a little more detail later on. And then obviously you’ve got your NHS pension. Everyone says it’s going to be a great pension and is a great pension. I think the issue that I sort of had with it was I was getting, I was getting taxed on my money going into the pension. So to me it kind of defied the rule of what a separate pension should be, where it’s untaxed on the way in and then taxed on the way out. So I’ve got to potentially get taxed twice on it and also the behest of the government. You know, since I graduated I’m not you, james, it’s not graduated the rules have changed three times since then and it’s already gone up to age 67. It’s already not as good as what our older payers are. And then I’m still 32 years away from being 67 claiming it. How many more changes are going to happen in the next 32 years? And yes, I’ve still got a bit. I have. I’ve opted out of it, but I’m expecting to get something back from it at 67, just to top up, as opposed to fully taking the money now, if that makes sense, and then the other way, I think, to potentially achieve it, which I’m, which what I’m planning on doing and trying to give people advice on, is from the limited company side of things. So you know, one of the things I’ll talk about later, the beauty of the limited company is that if you can spend a lot less than what you’re earning, the money limits company you only get taxed as you take out, usually dividend tax, and when you take it as dividends, the more you take out each year, the more tax you pay. So if you say, if you need to all and take it all out, then it’s it. That’s what people say oh, it’s not worth having a company because you’re it’s the same, you know, going to earn over X amount for it. But I kind of have a different view of it. If you need less money I’ll show an example later If you’ve got money left in your limited company and that kind of a cruise and you can use that to buy property or use that to buy sort of funds or or put in a stock market, then you take it out when you need to take out and then take pay the dividends, then you could actually take it out when you’ve stopped working. So you don’t need to take your. You need to do this as you need to. So you can by spreading it over such a long time. So the company is in this country, the way you are taxed. You are better off earning 50 grand a year for 20 years, then 100 grand a year for 10 years. So even though the long term it’s the same, it’s split because you get taxed a lot more. You’ve got the tax thresholds, if that makes sense. So having a limited company allows you to do that, allows you to pay yourself less, but then have money in the company to pay yourself for longer, if that makes sense.
Dr James:
It totally does. Yeah, I sense what you were saying as well was it’s the money that you can use to invest in the meantime, because the more you can get in there and have it not avoid tax but have it not be taxed as heavily, then the more capital you have to grow and, as we know, the power of compounding is exponential with time. Exactly Brilliant. We’ll delve into all of that in more detail in just a minute. From what you’re gathering, from gathering correctly what you’re saying there, I think we’re going to get a few maybe slightly unconventional opinions tonight, because I know that the received knowledge is to sign up to your NHS pension and do you know what. That’s totally fine, because I’m interested to hear as well, because I’m sure I’ll learn a few things as well in addition to everybody who’s listening, but what we should do. We should do or do your diligence and just say that this information it is all, of course, not financial advice, and you will like to, of course, do your own research. And we’re speaking we’re always going to be speaking broadly, because we can’t speak about everybody’s individual circumstances, so it’s just important to bear that in mind. I’m sure Zed will agree Real quick, guys. I’ve put together a special report for Dentist entitled the Seven Costs and Potentially Disasters Mistakes that Dentists make whenever it comes to their finances. This is the time Dentists are going through these issues and they don’t even necessarily realise that they’re happening until they have their eyes opened, and that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdentistuneinvestcom forward slash podcast report or alternatively, you can download it using the link in the description. This report details the seven most common issues. However, most importantly, it also shows you how to fix them. We’re looking forward to hearing your thoughts.
Zaid:
Yeah, no, completely. And I think I want to talk about the NHS pension side of things. Some people I kind of think, oh, I don’t want to lose my NHS job, I don’t want to get a private job because I’m worried I’m going to lose my NHS pension. I think they’re trying to kind of show that there is life outside an NHS pension. And, yes, if you’re in the NHS pension and you’ve got it, it is a fantastic pension. It’s a pension that will keep on giving until you die. So that’s why I’m not saying everyone should do it. I saw advice, I suppose a financial advisor, to work out my situation and work out what was right for me and that may not be right for someone else. But what I don’t want to do is people just think that, oh, I don’t want to go into the company because I lose my NHS pension, or I don’t want to get a private job and leave my NHS job because I’ll lose my NHS pension, and you know. And but also when you ask people, what do you get from the NHS pension? Not them, I don’t know. So I think it’s that side of it is just to kind of be open to the fact that you know there is life outside that.
Dr James:
Totally, totally. So we’ve talked about we will, of course, flesh all of that out in just a moment. We’ve talked about investing and I’ve talked about how investing looks different for different people depending on what stage of life they’re at things of that nature. I know that well off camera. We talked about how you wanted to maybe address people who are just starting out in their foundation as a foundation dentist, and what investing might look like them versus someone who’s a little older, someone who’s been working for a little while longer. Would you like to do that now, because I think you made some interesting points when I was not new.
Zaid:
Yeah, sure. So you know, as a young associate, someone who’s newly qualified, you’re going to be in a situation where you’re probably, from a money to sort of out expenditures point of view, you’re probably the richest you’ll be. You don’t have kids, you’re living rent to accommodation, potentially living with house mates. Yet you’re earning decent money and it’s really important at this point to kind of try and take advantage of it. And also what we talked about compounding earlier. You know compounding is massively different if you compound over 10, 20 or potentially even 30 years, because someone newly qualified coming at the age of 23 to 25, 30 years compounding still only gets into 55. You know, and you know the difference between compounding at that age makes a massive difference. And so just to give you an example of that, for example, £500 a month put into an ISA, if you’re getting 10% a year for 30 years, that’s a million pounds in a ISA. You know, if you did that age of 25 and that’s just £500 a month, that’s nothing more than that. You know a million pounds to have in your eyes at the age of 55. And if you’re getting 10% gains of a million pounds, there’s 100 grams a year, tax free. I mean, that’s your firing terms. Right there we can stop it and you can move on. So I think that’s really it’s a really easy thing to do, not? You know? They say you want to try and put 90% sorry, 10% of your earnings into savings. And one of the things I want to touch about later on, potentially if you’ve got time, is a bit mindset. You know, if I said to you, save 10% a year of your earnings, you think I don’t like to do that. If I said to you, spend 90% of your money, you think, okay, it’s the same thing. It’s kind of how you get your head around things. And another important thing to do is, as a young dancer, which really helped me in my position the time, I think, the days of just your run of the mill, nhs, being a successful dentist, family dentist. I think that they’re time limited and so when you’re young, you need to invest in yourself, and I did that through specialist training. I did that through my post-grad courses and I’m really thankful for it. I think it’s very easy to qualify after V2 or foundation training and then suddenly just find yourself an associate job when you think, wow, I’m earning this much money, brilliant, but actually that’s not going to go up and for the next 50 years potentially, you know, until you retire, unless you do more days or you’ve got to try and find a niche where you do more private work. So it doesn’t have to be formal specialist training. Finding your own niche and doing something I think is really important, investing in yourself. First of all, courses, because as much as you do that when you’re at that age, then you are when you’re sort of 30, 35 and you’ve got a big mortgage and kids to go back and do that training.
Dr James:
Can I just interject there? I mean, maybe it tends to be. There tends to be recurring themes over time as NHS dentists get paid less and less. And look at the derisory you know 1% increase to NHS staff recently, I think in real terms. Realistically I can’t see it getting higher. So whilst it might be 10 years down the line, you know your average associate NHS is earning 60k. That’s probably fairly average wage for NHS associate. Will they still? Will they actually earn any more money in real like, if you think about in real terms, once inflation is trapped in there it’s probably going to be less, I agree, you know.
Zaid:
I agree that you can sort of see that from. It’s been sort of 60k since I graduated. It’s, you know, 10 pounds a UDA was what was counted when I was 10, 12 years ago. And and also think about that 60k average dentists when I graduated most dentists were comfortably in the 40% tax bracket but actually the dentists that tax bracket has been increased to the sense that actually only 10 grand of it, you know you get taxed 20% up to 50,000. That was, I think that was about 30,000 back, you know, 10 years ago. So I think that shows why the by the tax brackets going up with inflation, that the dentist earnings actually haven’t changed that much. So unless you’re doing anything to increase your private income or have anything, you know a bit more niche that you do and that’s going to stay the same going forward and the only way you’re going to do more than that is by working extra days. But that kind of goes beyond what we’re talking about with financial independence.
Dr James:
Yeah, definitely Does that make sense. Yeah, no, totally, it totally it does. Essentially, we’re going to say some more there before I interjected as well.
Zaid:
Yeah, so I was going to say so when you’re at that age. You know putting some money aside into an ISA if you don’t know about, you don’t have to do the trading to get that money in. You know most funds, most index funds or the passive funds or active funds, you know you’re going to, on average, you’re going to gain about 10%, between sort of 8% and 12% a year on that. So even if you, you know, and that’s kind of the set and forget strategy you put it in there, you leave it in there, just keep going in rolling it over, you don’t have to go into full on trading mode to achieve those gains. So for the people who aren’t interested in doing that and looking at the stock market and looking at how to trade and what have you, then there’s no reason why anyone can’t do that. And I think at that age as well, it’s really important that first you want to really get on the housing ladder, you know, get on your own house or the house that me and my wife were sports. Probably in the three, four years that we had it probably went up by more than what we both managed to earn for those four years, and so the sooner you can get on that, especially now with mortgage rates being being so good. And you know we’ve got we’ve got Vinay on the group who’s fantastic when it comes down to getting mortgages and helping out from that side of things. Definitely. You know, I would say to the young associate you want to be the point where you think about specialist training or some form of postgraduate training, putting some money aside even up to 500 pounds a month and then looking at getting them housing. They help to buy ICES I don’t know if they’re still there or if they’re as good as they are, but potentially you’re getting 25% on top of that to help you. So I do think you know for a young associate that’s perfect. And as you kind of move on through your sort of career, when you become a bit more of an established associate, when you’re doing a bit more private work, you’re possibly doing a little bit less NHS. You’ve got more income and you’ve got more, potentially more income to invest as well. As you might be going over that 20,000 pounds a year on your riser. And when you start doing less NHS income, you’ve got more of an annual allowance to play with and therefore you can start looking at putting money into your SIP. So SIP essentially is a private pension and that’s invested by yourself. Up to 40,000 pounds a year is tax free. The only thing that would be careful if you are doing a little bit of NHS and it’s where some people can get caught out they may think I’m only putting 500 pounds a month that comes out of superannuation for my NHS pension. So that’s that, which works out about six grand a year. So I think I still can put in 34 grand in my SIP. That’s not the case. You’ve got to work out is in what the NHS matches that as well. So it’s a bit more of a complicated formula. So it’s definitely worth getting some advice before you go gun hope putting money into your SIP. So it’s definitely worth seeing a financial advisor to work out what your actual NHS contributions into your pension contributes that out of your annual allowance. Does that make sense?
Dr James:
It does. Yeah, I actually wasn’t aware of that and yeah, it sounds like it might get fairly complex. We definitely want to get some help on.
Zaid:
Yeah, and then I was when I was putting my money in my pension. I think that doesn’t make. I’m not going over that. Why is that the case? But it’s actually what it’s, what it kind of converts into. So it’s definitely worth getting advice before it because, yes, the SIP is great but if you’re putting too much into it, if you go over your lifetime allowance, you’re going to get penalised for it. So it’s potentially not as good as you might think it is. And then it kind of brings me on to the point We’ll talk about about a limited company. My experience is with that. So you see, I was mentioning recently on the group it keeps on getting asked about, then just considering sort of limited companies, and they get told it was only worth it to be earning over a certain amount. And I sort of have to disagree with that within reason. So I’m going to give you an example of as a dentist. When you start doing more private work and start earning more, when you start earning over that 100 grand barrier it’s been mentioned before in your podcast you lose your personal allowance. So I think someone’s saying you actually potentially get taxed at 60 60% on the effective tax rate on that, Well, what they mean.
Dr James:
so by the time you’ve dropped in your national insurance, you’re higher rate tax, and there was some. There was another figure, there was something else that they used to calculate as well. There was some kind of other kind of abstract way of thinking of it. I believe that the deduction wind up being about 70 P in every pound or something, no 60.
Zaid:
Yeah, yeah. I think if the student loaner became 70 P as well, then that was the end, yeah.
Dr James:
So it becomes that much less lucrative to work over that level. And again, maybe you want to start thinking about your sip, or I think you’re going to talk about a company there as well.
Zaid:
Yeah, so I’ve put out an example, so bear with me, there are some numbers here. But so say, for example, the way limited company. Let’s start with the way how a limited company works. Your money is paving to limited company. You need to have a separate contract from your, from your principal, but instead of being entitled to you and your paystips are to you, it’s to that company and what happens is you pay corporation tax on all the profits the company makes in that year. So that meant it’s 90%, as we’ve heard. It’s going to go up to 20, potentially up to 25% for over 250,000 in the next two years. But that’s after your expenses, after potentially your company car, which I’ll talk about later as well, and then after your pension contributions. Now for your SIP contribution, it’s self-employed, it’s like different. I don’t think you actually get that as tax back. I think it’s just more of it goes into your pension. I think again, you have to get advice regarding that. But from a limited company, if you put in 40,000 pounds from your limited company into your, into your SIP, you don’t pay corporation tax on that at all. So, yeah, so that’s why it’s pretty good from that side of things. I think that the thing for me is that you can control how much you actually do. So actually you can control the tax bracket that you end up being on. You get the way you take the money out, you give it, you pay yourself a salary. Usually it’s about nine, just on the nine, around the 9,000 pound mark a year because that’s the threshold where you don’t pay national insurance but you’re getting the national insurance benefits. So it still contributes to your state pension when you retire, but you’re actually not paying any tax on it at all If it’s below your personal allowance and it’s below your national insurance threshold for contributions and the rest you pay yourself. On dividends and the dividend tax is the first. 2000 is free, tax free. Between 2000 and it’s and the basic rate, what takes you to the basic rate taxpayer is tax at 7.5%. That’s attractive, but when you go after that above the 50,000 pound threshold to 150,000, you actually pay 32.5%. So you’ve paid 19% and then you’re going to pay another 32.5% on that. So yes, if you that’s what you’ll say, it’s the same, because by the time you’ve worked that out, you work out the effective tax rate. It’s not that much different, but that’s if you take all sorry.
Dr James:
I was just going to say, if you earn a lot, a lot, then there will be like a point where that crosses over and becomes more efficient. I’m guessing, but it’s going to be. Maybe.
Zaid:
Maybe you have that figure, but not necessarily it’s. It’s how much you pay yourself. So you’re here if you’re earning, if you’re coming to be earning 110,000 a year, you don’t have to take out, take it out on those dividends. You take out what you need to live on and in one year that might be 40,000 pounds. You need to live on and you pay the 7.5% of 40,000 pounds. Or it may be that one year you may think actually I’m buying to buy a car this year, I need to get, I need to borrow, I need to get 70,000 pounds. So then for just for that year, you pay a little bit more. But it’s not when you’re being fully taxed at 40% by everything. Everything that you buy, everything that you you get paid automatically gets taxed at that every year, year on year going forward. So if you don’t need to live on all the money of what you’re earning, then it’s a fantastic way to really help you with that. Because you know, if you’ve got school fees and you’ve got all these things going on, that you literally you’re earning 110,000 a year but you need all that money to live on, then first of all, I think you should really consider things you can do to try and reduce that. But secondly, if you’re in that position then a limited company is probably not going to help you. And that’s why you kind of see these figures where people say if you’re earning a certain amount, it’s about the same. So the example I’ve given here if you’re self-employed, okay, you earn 110,000 a year. Let’s say 20,000 pounds of that goes into your pension contribution. 5,000 pounds of that is your expenses for being self-employed that year. So your indemnity and everything and all that that leaves you a take home of just under 70,000 pounds. And on that you’ve paid about 30,000 pounds income tax and about 5,000 pounds of national assurance. And if you can so you’ve said we can take home 70,000, but you only need 50,000 to live on. You’ve got 20,000 to invest, whether that’s in your ISO or your property or whatever. Now if you follow the same numbers but transfer it into a limited company, the 110,000 pounds limited company makes again 20,000 pound pension, 5,000 pounds expenses. You pay yourself the salary of 9,000 pounds. That leaves 76,000 pounds in your company. The incorporation tax you pay 14,500, roughly about 14,500 pounds in that and then your dividends. If you need 50,000 pounds to live on, you take out roughly about 45,000 pounds of that as dividends, because you’ve got your 9,000 pounds salary, you pay about 4,000 pounds dividend tax. That takes you to about 50,000 pounds, so your total tax paid is actually 18,500, as opposed to the 35,000, which would have paid itself employed. The other difference is, though, is that leaves about 32,000 pounds left in the company, so now you’ve actually got 32,000 pounds to invest in whatever you want, as opposed to the 20,000 pounds. So, actually, if you wanted to use the by property, you’ve had your property podcast in the past. So, saying the way the rules are, you’re probably better off investing, buying a buy to let through a property, because the tax savings you can make that money is already in a company. Sorry, buy a property through a company, that money is already in the company. So 32,000 pounds is a deposit. It’s going to go much further than 20,000 pounds as a deposit, and that’s just after one year, the difference being a couple of things. One, if you were going to take out all that money that was left over in the company 76,000 pounds in the company you would actually end up paying as much tax as what you would have done if you were self-employed, and actually probably a little bit worse off, just by roughly about 1,000 pounds when you work out your dividends and your. So I noticed that a lot of things trying to get your head around. So the advantage for me is that if you can leave that money in the company 30,000 pounds left in the company each year you can invest in property, you can invest in stocks and shares, and the way to look at it is after 15 years of doing that, and if you decide to actually not do anything with it at all, not even invest a penny of it, so you’re getting zero gains you’ve got 400,000 pounds roughly in that company. So in 15 years you can keep paying yourself a 50,000 pound dividend a year for another eight years. So you’ve worked 15 years. You can stop working in 15 years but still pay yourself for another eight years by using the money in the company, and that’s if it’s grown by zero.
Dr James:
Does that make sense? It does yeah.
Zaid:
So you’re money boxing the money that’s in the company without investing in anything at all. But obviously, if you are going to invest it and you’re going to compound that, that’s going to give you more years. You can pay yourself a dividend without a flunger and that’s actually not actually working. Does that make sense? It?
Dr James:
does. Yeah, so maybe the receive knowledge or the thing that’s chopped around a lot is that a limited company becomes that much more efficient when you’re a higher rate taxpayer. But your point is that it’s actually, if you take into account the things that you said even before it gets to that point, it’s actually useful.
Zaid:
It’s useful if you don’t need all the money to live on.
Dr James:
Yes, of course.
Zaid:
So if you can live on, for example, this example if you can live on 50,000, but your company’s getting 110,000, then it’s really useful. If you need that full 110,000, then the limited company is not worth it. But then to be fair, if you need all that money, you’re not going to have any money left over to put into your eyes or to invest in any way whatsoever. So I think that side of that is important. I think people just throw it away by going you know you can’t live because of this or whatever, but I think that’s just really important to note down. I’m more than happy to kind of put those figures on one of the Facebook groups so people can actually see those numbers as opposed to me reeling off on here.
Dr James:
Yeah, definitely yeah.
Zaid:
And also I think you can work it out yourself. There’s lots of dividend calculator calculators on the internet. There’s lots of self-employed income calculators. You can put your income in there. It will tell you how much tax you pay, how much insurance you pay self-employed. It will do the same thing with your dividends, so you can kind of work it out from there.
Dr James:
Here’s a question for you Stocks and share of the asset versus SIP. You said that you can pay into your SIP from your limited company. Can you pay into your stocks and shares ISO from your limited company?
Zaid:
No, you can’t, Ah, so that’s the slide.
Dr James:
So that’s yeah, so I’ll consider.
Zaid:
So actually if you’re not a limited company, then you’re better at just putting your money into an ISO, because an ISO is a fantastic way of doing it because you don’t get taxed on it on the way out, but it’s been taxed on the way in, yeah. So you’ve been taxed 40% on that money that you’re potentially investing for it to go in While a SIP. You’ve actually had tax breaks from putting into your SIP but you would get taxed on the way out of the SIP. And then the other advantage is sort of a limited company. So the purchase of a company car. So I’ve got one place of work. I can’t claim petrol or any form of vehicle expenses to my one place of work. If I was locating, if I worked in multiple practices, then you’ve got a scope to do that. But the new ones they brought in for the electric cars, you actually get a full tax write-off of the cost of the car. So if you bought, if provided as a full electric car, so a fully electric car. So, for example, you’re going to buy a Tesla, say buy the Model 3 for 30 to 40,000 pounds. You buy it through the company. You don’t pay any tax on that 30 to 40,000 pounds, you don’t pay any dividend tax on it. Sorry, you don’t pay any corporation tax on it. You don’t pay nothing. So if you’ve made profits of 40,000 pounds in that year in your company and you start buying a company car, you actually don’t pay any corporation tax that year. And that’s a car that you can use for your need If you’re in personal need as well as going to work and essentially the company owns the car. And because the company owns the car, the maintenance on the car, the tires on the car, the servicing on the car is paid for by the company. So you also get tax breaks on that and the other thing as well. If you were self-employed and you wanted to buy a Tesla Model 3 for 40,000 pounds, you would have to earn 70,000 pounds after, and then you can work out after tax and all that stuff of how much you pay for the car. So even if you were taking out dividends or what have you, you can take out less dividends because you don’t have a car to pay for anymore. It’s paid for by the company and what you pay is then you pay a benefit in contact. So company cars have always been around, but beforehand you’d pay normally a benefit. In contact it was between anywhere between 18 and 30% of the percent. But with company cars now with full electrics, it’s 1% for the next tax year coming up and 2% after that. So what that means is you work out the 1% value of the cost of the car so 40,000 pounds, model 3, for example. You work out whatever 1% of that is. It’s 400 pounds and then you only actually pay 40% because if you’re a 40% taxpayer you only pay 40% of that 400 pounds. So you’re actually only paying about 108 pounds a year for your company card for you to be able to use it to have your own personal benefits out of it. You pay that. So whenever a company buys something, if there’s any benefit that you’re going to get personally from it, there’s a benefit in kind tax to pay. The most common thing is the car. So that’s really cheap. You know £108, which you have to pay, but actually you’ve got a 40 grand car paid for which is completely tax deductible. So that is a massive incentive and especially I’m very much into my cars. When I saw that I thought it was a fantastic opportunity. That was a massive bonus. The first course of my counter to ask him to find out a bit more about it, and the second call was to a car dealership to order one when I found out how good they were. So definitely worth considering for that. The other potential advantage to lend to company is if you’ve got a spouse that doesn’t work, you can actually or does work or earns very much lower tax pay. You can give some of the dividends to them as well, so you can use some of their tax-free allowance and I like that. You can choose to pay yourself more one year compared to another year. If you’ve got, say, you’ve got to do an extension in your house, for example, you just pay yourself more of a different one year. Take the tax it for that year, leave the rest of the money in the company. The other thing I quite like about it is that you know we’re talking about income protection and stuff like that. It kind of covers you really for the first, potentially the first six or 12 months, because if you’ve got money in the company when we had the coronavirus pandemic we weren’t working for three months If there was money in the company you’re still taking out dividends. So if you had that company set up and you’re paying yourself dividends every year. Well, it didn’t matter whether you didn’t work for three or four months because you already had the money from the company to kind of cover you for that and potentially, depending on how much money you’ve got in the company I was saying earlier, you know, if you didn’t touch it at all and you had 400,000 pounds in your company, you can not work for eight years and still keep paying yourself 30 grand a year of dividends. So that’s a good reason, that’s a good advantage. I think also budgeting is good because it smooths out the good years and the bad years. So you might get 100 grand one year, but 30 grand another year and 250, you know, 150 grand a year after that With the company, it doesn’t matter, you keep paying yourself the same dividends. From a cash flow point of view, it’s really useful. However, the downside is obviously it’s not for everyone. You’ve got to get. I think it’s definitely worth getting advice to see whether it is worth for you, but I don’t think you should just sort of write it off because someone in the group has said oh, it’s not worth it if you’re earning less and so and so, and also you’ve got to be out of the NHS pension. So superannuation and NHS. Superannuation on the NHS and limited companies don’t go hand in hand. So that’s really important to get advice on that as well, to make sure it is your situation worth. If you’re doing a very small NHS contract then it’s probably not worth being in it. But for the majority of your income as NHS then you kind of got to get advice on and do the maths and think is it worth it, is it right for you?
Dr James:
Yeah, because what I’ve always the way I’ve always grasped these sorts of conversations whether or not a limited company is worthwhile is that, once you get into the higher tax rate, over 50 grand is due to change next month. I believe it’s slightly higher. Maybe you’ll know off the top of your head.
Zaid:
They only got margin, isn’t it?
Dr James:
Yeah, I know that the personal allowance is only going up by about 70 quid. But anyway, whatever that figure is, and then they’re freezing it for five years actually. Which is actually a very, very subtle, but taxful way. It’s asking us a lot more, because I think inflation is going to be crazy these next few years. What? Were the money for the minute. There’s a variety of reasons why I think inflation is going to be high these next few years. I actually think that might make a good podcast, but maybe we’ll save that thought for another day. But where was I going with that? Yes, so anyway, once upon a time well maybe even before this podcast I thought there’s a hard limit over 50 grand, I think about a limited company. Before that it doesn’t really enter my thought process. But what you’re saying is there’s more of a gray area there. That’s really interesting.
Zaid:
Yeah, definitely. It’s like every situation is different and you put the phone to your accountant and say, look, and if your accountant is not keen on doing it, then there’s nothing stopping you getting someone else, especially if you’ve got a specialist dental accountant who understands these things. It really is worth looking into, fair enough. So then, what I want to then talk about really is when we put our money into our SIP and we put our money into our ISA, how do we achieve financial independence from that? So, like I was saying earlier, if you put 20K a year into your SIP and you put 20K a year into your ISA and you’re getting 10% a year, compound that for 20 years, that’s a million pounds in each. You’ve essentially got two million pounds to live on. And then, even if, at that point, if you take your ISA, where you essentially you were putting in into a high risk fund where it kind of grows at 10%, when you get to that point you probably want to put it on a low risk fund. It’s more bond based as opposed to equity based and even if you’re taking a 5% return a million pounds in your ISA and you’re taking out 5% of that, that’s your 50 grand again, which is completely tax free. So you don’t have to wait until you’re 67, your NHS pension to actually potentially look at not working anymore. That’s the money and that doesn’t take into account the surplus you’ve got in your limited company that you can pay yourself for a few years or you can at the minute. There’s something called an entrepreneurial tax. You can pay 10% of the tax of whatever’s left in the company and you can take it all out of the company when you shut it down. Whether that will be around when I’m at that point I don’t know, but I mean that’s quite a good way. You know, if you’ve got 400,000 pounds in your company and we know that to take it all out is at 7.5% or 32.5% when you get over the 50,000, 10% and then be able to keep the rest of it is fantastic. But you have to finish it down, the company. You can’t work in that field for three years after you’ve shut it down as well. But again, that’s a potentially good way of sort of capitalising on that and you’ve got a big lump sum from that as well. So, yes, you can easily live off your riser. So if you did this, you put 20,000 pounds a year when you’re 25, let it compound for 20 years, you can get to 45. And you’ve got a million pounds in your riser. You can use your riser to live on till you sit able to take money out of your sip, which is at 57. And then you can keep that going until you get to 67 when you can take out your NHS pension and your state pension. So you’re kind of doing things to tell yourselves over. The other good thing about the SIP in comparison to a NHS pension. Well, it turns out you got an NHS pension, a fantastic, you know the best pension you ever get, but you can’t. You get taxed at a normal income tax. So if you’ve got a really good NHS pension, you’re going to be paying 40% on a lot of that income. Well, with the SIP, once you’ve taken out your 25% tax-free lump sum, the rest of the money you’ve got in your SIP, you can kind of drip for you that you don’t have to take it every year. You know you can just kind of take enough just to keep you under that threshold because you get taxed an income tax on it. And then the money you don’t use, I think it’s quite beneficial when it comes down to inheritance tax to passing on to your kids as well. So again, people can get advice on that. But I know that is an advantage you all regard in that. Savings. You know you think about savings and investing and stuff something that’s quite a boring thing to do, but actually when you kind of do the maths and try and work out at what age you can potentially think not potentially packing it in well, pack it in if you hate the job but cutting down to the days you want to do, it actually potentially quite exciting really. And you think that you don’t have to wait till 67. I mean, that was the person who had the NHS pensions on the things. Like God, I’ve got to keep on working until I get to 67. You know what, if I die at 68, I’ve paid all this money and then I’ve only had one year of pension. So being in a position where you can kind of control and easily limits your days or your hours or be a bit more in charge of what you want to do, that is my major grievance with the pension or some pensions that you have to wait at a certain age to get them out.
Dr James:
Do you know what I mean? It’s all well, I’m good, if you do live to that age and whatever. You have a long, happy life after that. But what if you spend all this money and you don’t actually get your hands on it? This money’s stuck in Neverland and you never actually get it, and the NHS person is not something that you can pass on to your grandkids as well. A sip is slightly different, because you can do that. I’m not saying that one is right and one is wrong. I’m just saying that maybe there’s a little bit more to it and there’s more opinions out there and more things to consider, just as you were about to say. So how do you cut in?
Zaid:
Yeah, no, I completely agree, and I think to max out your NHS pension, you’ve got to keep on working in the NHS at that rate that you’re doing up until the age of 67. And I think for a lot of us that’s not something that we want to do. So, yes, by all means it’s there, but you don’t have to worry about if you opt out when you’re 40, you’ve put in half the amount of years you were going to put in. You’re still going to get something back at 67. But it gives the opportunity that, okay, you’re going to get not, and that’s not enough to live on, but that’s where your sip comes in. You can top that up. That’s where your ice comes in. You can top that up so you still have a comfortable lifestyle from that and then have the advantage of potentially having that lifestyle 10 years earlier than 67. I mean, there’s a guy I played golf with. He was a fireman, joined at 20, retired at 50. He’s 18 next year. So he’s like I get to 80. I’ve retired for as long as I’ve worked, but we’re not going to be in that situation so, especially from a government pension, because these are the rules changing every time. So I think that was my sort of issue with it. You’re kind of tied down a little bit regarding that.
Speaker 3:
Hey guys, just jumping in here to let you know that that concludes this episode of the podcast. Zed and I wound up talking for so long that we thought it would be better off split into two separate episodes. The next episode will focus on the topic of trading and will be released in the usual places over the next few days. Speak soon.
Dr James:
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