Closing my Ltd Company but carry on paying myself

[JohnSpiderWebb]

I have about 8 years before I retire and all things being equal, I hope to have accumulated quite a bit in Retained Profits in my company. Obviously I want as much of it back as I can.
I have read about what has to happen and what has to be paid and have concluded (at present) that getting Entrepreneurs Releif is about the best option.
However, what if I were to keep the company going and carry on paying myself a salary and dividends until its all gone, Then striking it off.
This would allow my Pension to grow a bit more before I start drawing down on it.

I'd be interested in your opinions.

[CloudWalker]

[CloudWalker]

Sorry but you can only take dividends out of your post-Corporation Tax profits, i.e. from the money you have actually earned, whereas a salary can be paid out of future earnings (e.g. by borrowing money from your bank).

[ASB]

I have about 8 years before I retire and all things being equal, I hope to have accumulated quite a bit in Retained Profits in my company. Obviously I want as much of it back as I can.
I have read about what has to happen and what has to be paid and have concluded (at present) that getting Entrepreneurs Releif is about the best option.
However, what if I were to keep the company going and carry on paying myself a salary and dividends until its all gone, Then striking it off.
This would allow my Pension to grow a bit more before I start drawing down on it.

I'd be interested in your opinions.

Yes, you can do that if you wish. Obviously the funds have all suffered CT and may suffer income tax if the regime changes or if it take you into higher rate tax.

There is nothing to stop you paying yourself a salary. If you have no other income then a 10k (ish) salary to use your personal allowance is generaly most tax efficient since it is chargeable against CT.

However, in your case this would create a taxable loss. Nothing particularly wrong with that. The question is whether you can carry back and restate the accounts, thus getting relief.

THe carry back rules are (generally) appropriate if it is the same trade being conducted. Obviously in you case this is questionable. Check the rules on HMRC website to make your own decision.

Of course when carrying forward you could perhaps find some way of generating some fees in odd years every now and again to be able to generate profit to offset the loss being carried forward.

There is also another issue. This is that if you are not carrying on trade then it might become a close investment company. This has implications for tax rates, though as they are getting harmonised this may well not be an issue. Also since there is apparently no taxable profit it could be moot.

Some things of course will depend on the income that is being generated from the retained funds since these are simply income and chargeable to CT accordingly.

[JohnSpiderWebb]

Thanks for all the information. I didn't know about salary only being taken against future earnings.
I'll get more advice nearer the time, but it still sounds like the best option to me.

[TheFaQQer]

Thanks for all the information. I didn't know about salary only being taken against future earnings.

That isn't correct, nor is it what has been written in the thread.

[TheCyclingProgrammer]

Clearly the most tax efficient way to extract company funds is to keep taking dividends up to the higher rate each year until you've exhausted the retained profit as there is no further tax to pay.

But if you need more than that to live on or you want access to all the cash straight away, then you should consider an MVL and taking advantage of ER.

On the subject of salaries while no longer trading...if you're no longer trading and have no intention to trade, could there be an argument that any salary is not wholly and exclusively for business purposes? I guess you're still acting as company director and have responsibilities even if not trading. I'd be surprised if it was challenged but something to consider.

I've always thought the only reason to take a basic salary instead of just taking dividends is to benefit from the reduction in corporation tax but if you aren't making any taxable profit to offset the cost then why not just take dividends?

[TheFaQQer]

I've always thought the only reason to take a basic salary instead of just taking dividends is to benefit from the reduction in corporation tax but if you aren't making any taxable profit to offset the cost then why not just take dividends?

You'd still get an NI stamp if you needed one towards your pension if you were drawing salary.

[ASB]

On the subject of salaries while no longer trading...if you're no longer trading and have no intention to trade, could there be an argument that any salary is not wholly and exclusively for business purposes? I guess you're still acting as company director and have responsibilities even if not trading. I'd be surprised if it was challenged but something to consider.

Yes, there could. I forgot to highlight that. If the salary isnot for the purposes of trade then it is not an allowable loss for tax purpose.

I've always thought the only reason to take a basic salary instead of just taking dividends is to benefit from the reduction in corporation tax but if you aren't making any taxable profit to offset the cost then why not just take dividends?

That is a simplistic view (and there is nothing wrong with it in the general case).

Obviously if the salary fails the deductibility test then there is no CT advantage and it is pointless.

But, let me outline 2 possible scenarios.

1) Pay yourself a salary of 20k. Still allowable because the trade is continuing, albeit winding down. This results in a pre-tax loss of 20k. This can be, usually, carried back 1 year. Restate accounts, get 2k CT back and there is no tax loss going forwards.

2) Assume the above happened. We now get to year 2 (or year 1 if carry back was not possible). The 20k salary generates a tax loss of 2k. Shame there is no income. But wait.....

Let us just assume that there is 8k of interest and/or dividend income. This of course is chargeable to CT. So the 2k can be used against that. Or perhaps if there are some equity these could be bed and breakfasted crystallising a chargeable gain which is subject to CT.

It's not for everybody of course. But if it so happened there was a sizeable chunk of cash lying around generating income then it might not be unreasonable to pay oneself a small salary for management services.

Also it will only be effective if there is no other income, i.e. one has some spare personal allowances. Otherwise the personal tax paid will simply offset the CT saved. Thus it does depend very much upon the individuals circumstances.