Retained profit - how would you get your mitts on it?

[Olly]

My ltd co was only formed in January but now I'm taking a perm role so it's unlikely it will trade further.
It has about £91K from which corp tax will/could need to be deducted. I've not taken any salary from it and in the 24/25 tax year I received a salary from an umbrella into the 45% bracket.

Option 1
Pay it into pension over 2 years (I maxed it out in prior years) and somehow claim a refund for the CT in year two as the Ltd will have made a loss.
Of note, the marginal tax rate on my perm salary is 40% this year and fair chunk will be 45% next year (plus the NI) that I would be able to avoid by having my new employer pay into my pension via salary sacrifice instead of using the allowance to avoid CT and dividend tax. Also, when I withdraw my pension I intend to keep in the 20% tax bracket - so an effective 15% tax rate taking into consideration the 25% tax free allowed from pension.

I wonder if I can pay it into pension in about 7 years time when I've stopped working - that would hands down be the most tax efficient way!!!!! EDIT - no you can't - you can only get a refund for CT paid up to a max of 3 years prior.

Option 2
Pay (almost) 25% CT on it, leaving about £69k and then take as dividends over 2 years taxed at 8.75% in about 7 years time when I plan to retire. So an effective rate of 31% which is more than the 25% to 30% (ie. marginal rate minus the tax I'd pay when taking the pension) + NI rate I'd be paying on my new permie job salary if I used my pension allowance against the Ltd's funds.

As Malvolio points out below - it may not be 8.75% when I come to draw the dividend though!


Option 3
Something better

What would you do please?

[malvolio]

I wouldn't do too many calculations based on today's rates. they are vey likely to change come October...

CT can be rolled back into previous years, but I'm not sure of the details these days and whether or not the company has to be trading.

[Ketto]

I’d take professional advice from an accountant or IFA personally as there is a lot of scoope to do things incorrectly or in a sub-optimal way.

If you don’t need the money as personal funds then doing something via pension is probably best.

One option you have not mentioned is doing an MVL, if you think you won’t need a Ltd again for two years that may be worth considering.

[Olly]

I’d take professional advice from an accountant or IFA personally as there is a lot of scoope to do things incorrectly or in a sub-optimal way.

If you don’t need the money as personal funds then doing something via pension is probably best.

One option you have not mentioned is doing an MVL, if you think you won’t need a Ltd again for two years that may be worth considering.

I probably will speak to a "professional" but as is ALWAYS the case, it's best to inform oneself as much as possible before hand.
BADR MVL can't be done until a Ltd is 2 years old by which time it will be 18% plus about £1800 in costs. A lot more than current 8.45% dividend tax (though my current rate would be 33.75% and therefore an eyewatering 50% tax overall - remind me why outside IR35 is better?????)

[Olly]

I wouldn't do too many calculations based on today's rates. they are vey likely to change come October...

CT can be rolled back into previous years, but I'm not sure of the details these days and whether or not the company has to be trading.

ChatGPT - which NEVER makes mistakes - says

"If a company makes very large contributions (e.g. to a director’s pension in a year of low/no trading), HMRC might question the timing or wholly and exclusively test — especially if it looks more like personal wealth planning than a business expense."

[Ketto]

Waiting until Jan 2027 when BADR is feasible would be a pain, but then waiting 7-9 years for the dividend plan to be an option would also be.

As is often the case with these things there is usually one option which beats all others, your option 1 - Pension. Especially as retirement isn’t too far off.

[Olly]

Waiting until Jan 2027 when BADR is feasible would be a pain, but then waiting 7-9 years for the dividend plan to be an option would also be.

As is often the case with these things there is usually one option which beats all others, your option 1 - Pension. Especially as retirement isn’t too far off.

I'm not at all sure that's the case. (a) the Pension option may be challenged by HMRC and that's a headache I absolutely don't want. (b) I'd be "loosing" out on the salary sacrifice AVC from my new employer. This means the effective tax rate is 42% compared to 40% via BADR or 31% via dividend.

Pension has the benefit that growth will only be taxed at 15% which probably means it pips BADR in practice, but for the potential HMRC issue I'm best ruling it out I think. Holding out till I earn less so that I can go the dividend route seems to be best at 31% tax - even if the allowances or % change.

As I muttered earlier - who says outside IR35 contracting is all that rosy these days?? Especially in my situation. When I closed my previous Ltd via MVL I'm sure I worked out my total tax liability was around 27% everything said and done and I didn't make any pension contributions during that period.

[woody1]

I would consult an accountant. You are talking not insubstantial sums of money here, so it's worth paying for advice. Draft and print something off which outlines the whole situation, and what you think your options are, including the risks/downsides. They may come up with something better, or a slight tweak, or allay your fears about going down the pension route.