How much to take out of company?

[ujjain]

With the new tax regulations, what's the most tax advantageous amount to get out of the company?

I am wondering if it's better to leave most money in the Limited company or not.

I'll have made around £120k by the end of the tax year as a contractor if all keeps going well. I spend an average of £3500 per month. Every month I pay myself a salary of £833 and £2000 dividend. And sometimes I pay myself a little more dividend, for things like holidays and maximising my ISA deposit.

That still leaves a lot of money in the Limited company at the end of the tax year. Is it a good idea to maximize my dividend pay-out under 100k before hitting the additional rate?

[northernladuk]

I know I'm going to get shouted at but please speak to your accountant first. Come back here if you have questions about her said but you pay a professional to look after your finances so they should be the first person you turn to. They will discuss your personal circumstances and advise to suit. We will just take a stab at it which is likely to raise more questions than it answers.

[DannyF1966]

My line of thought, and I may be wrong, is that it's going to be more tax efficient to pay dividends this year, even if it takes you into the higher tax bracket, than next year. I'm planning on paying a larger dividend in March, basically draining the company's funds, and sticking it into an
ISA, as it'll cost me less in tax than withdrawing it in the future.

[ujjain]

I've e-mailed my accountant as well, but he always sends back so much text that makes me a little confused. And regarding a financial advisor, I think it's the best to educate yourself in personal finance rather than depending on somebody else, they seem expensive too. This page How much will the April 2016 dividend tax changes cost you? has a very clear table though.

It looks like tax-wise I have been a bit unlucky to start contracting right now, but that I might as well get a lot of out the company right now and save a little on tax.

[Fred Bloggs]

Depending on circumstances, you might consider a lump sum investment into your pension. FTSE is at a three year low.

[northernladuk]

I've e-mailed my accountant as well, but he always sends back so much text that makes me a little confused.

So ring him back and get him to explain it. You are legally responsible for your accounts as you sign them off at the end of the year. Pleading ignorance when it all goes wrong isn't a defense. If you can't understand what the accountant is saying related to withdrawing your money I'll bet you don't fullynundertand VAT and the year end Docs either.

Ring them and don't get off the phone until you fully understand.

[Pondlife]

So ring him back and get him to explain it. You are legally responsible for your accounts as you sign them off at the end of the year. Pleading ignorance when it all goes wrong isn't a defense. If you can't understand what the accountant is saying related to withdrawing your money I'll bet you don't fullynundertand VAT and the year end Docs either.

Ring them and don't get off the phone until you fully understand.

WNLS.

If you don't understand the answers you're getting from your accountant then get them to explain more clearly, otherwise you WILL miss something at some point and it may cost you dearly.

You've seen a table that shows that the tax owed on divs will be greater next year than this one but this is not the only option. Hence the advice to speak to your accountant. Maybe depending on your future plans there are better options eg if you're getting out of contracting and/or planning on going permie in a few years then maybe hold off and go for an MVL when the time comes. Or as Fred Bloggs mentioned, top up your pension.

[BolshieBastard]

Went to see our accountants yesterday for end of year sign off and asked the same question. He gave me his answer and Im very happy with that.

[WordIsBond]

You have so many options. And no accountant can tell you what to do, NO ONE can tell you what to do, because it depends on your circumstances and your values and your best guess as to what the tax law will be in future, and your best guess as to how your contracting is going to be in future.

So you can get advice from an accountant as to taxes now and for next year, but that only takes you so far. The accountant doesn't know how optimistic you are about future revenue, and he's going to have to be very careful about advising based on your assumptions, anyway. You need him to educate you, but you are going to have to make the decisions yourself.

How much money do you want to take out every year? How much of a war chest do you want to build up? How much tax are you willing to pay, and how willing are you to take the time to fully educate yourself to plan effectively to minimise your tax outlays? How much of a pension do you have, and how important is it to you to build a big one? Do you have children, or intend to have some someday, and how will that affect your spending requirements? Do you want to take a year to sail around the world in a sailboat, and need funds for the boat and the year?

All of these things tie in to what is "best" or "right".

Do you think they are going to kill tax relief on pension contributions? Do you think the dividend tax is going higher? Do you think MVL rules are going to get tighter still? All of these things affect "what is best."

You either need to accept paying a little extra tax or get smarter.

You mentioned the additional rate threshold. Do you know what is the effective tax rate on dividends in the additional rate band for this year? It works out to around 30%, I believe. Have you compared it to the tax rate in the higher rate band next year? It's 32.5%, I believe. Comparing the two appears to me to mean it makes more sense to take dividends this year, even into the additional rate band, then it does to defer them to future years if they are going to be higher rate band dividends.

Is that right? I don't know, I haven't asked my accountant yet. It doesn't matter if you aren't going to be taking higher rate dividends in future. But if it is right, and if you are planning to take higher rate dividends in future, you may want to get as many of them out of the company this year as you can, even if it means paying additional rate tax this year.

You'll pay an accountant to advise you on the different options. But if he's doing his job, he's NOT going to give you a simple answer, because there is no simple answer. There are too many unknowns in the future and too many variables in personal situations and plans and lifestyle choices/values, for there to be one right answer.

You said you want to educate yourself and not depend on someone else, but you also sound like you can't be bothered to carefully read and understand what your accountant sent you. So then you come looking for advice from a bunch of guys on the 'net? I'd say either take the decision to trust someone and hand it all to him, or go back and read what your accountant sent, get yourself educated, and then make your own decision. You decide based on how much time you want to spend to save a few quid in tax.

You might be better off just focusing on making more money and let a financial adviser drive this. Sounds like you are doing ok and can afford to pay a good one.

[Cirrus]

Currently you earn more than you need so that gives you options

If you want to build a pension or even better are going to 'retire' in the near future then bung what you can into a SIPP, whilst this route is still available.

If you are going to have a period of reduced income (resting, sabbatical, business development etc) leaving the money in the company helps to reduce exposure to higher rate tax.

After that pulling out cash via dividends is still the most obvious strategy, if you don't mind the low but ever present risk of a call from Revenue Investigations.