Keeping Dividends working in Company

[castoff101]

Any advice on what to do with a six figure sum in the company accounts (no not Northern Rock!).

I take out a small salary from the company and with some income from investment properties my income is around the 40k mark, so just breaking into the 40% tax bracket. I can manage on this sort of income quite happily. I would like to take a dividend but do not see much point in taking money out just to pay nearly half in tax

So my question is how do I get the best value out of this money? The advice here is not to buy a company car for instance, but at least I would be having some fun with the money … Any ideas what to do with this cash – need an exit strategy please?! I am in my fifties so I am thinking that I may as well just to leave it in the company accounts and draw down on it when I stop working in five years time. Other thoughts?

Thanks chaps.

[NotAllThere]

This used to work (I knew a few Australian contractors who did this in the late 90s).

Close down the company. On the same day leave the country and don't return for two years. There's no tax due on the retained earnings.

[castoff101]

ok...

Thanks, one idea. Must admit it does appeal a bit. Spending a couple of years travelling around the world being funded by you know who

[PAG]

What about taper relief ??? You'll have to pay tax but it will be capital gains tax (I think).

[r0bly0ns]

If you plan on retiring in 5 years is might be worth shoving a large chunk into a pension, if I remember correctly, your company can put quite a lot of money into a directors pension tax free.

Speak to an accountant about what the limit's are and the impact on how much tax you would pay when drawing your pension though, as I am not sure of the figures.

[IR35 Avoider]

If you plan on retiring in 5 years is might be worth shoving a large chunk into a pension, if I remember correctly, your company can put quite a lot of money into a directors pension tax free.

Speak to an accountant about what the limit's are and the impact on how much tax you would pay when drawing your pension though, as I am not sure of the figures.

Your company can put over 200K per year into any kind of pension (stakeholder or SIPP will be be the best types) tax-free and you can start taking the money out when you're 55. Whether you've retired or not is irrelevant. You can work and take income from your pension at the same time if you want to. In your case the best strategy might be living on earnings from work when you have them and taking money from the pension when you haven't. One quarter of the money funnelled via the pension will be tax-free, and the rest will taxed at a lower rate than salary because you won't have to pay NI on it.

To go back to the original question, put all new earnings in pension (getting tax relief against corporation tax) and draw the retained earnings as dividends, up to higher-rate threshold, until you've emptied the company's bank account. By that time it sounds like you will be old enough to start taking income from the pension scheme. You need to do some detailed planning of how to structure you pension into lots of different policies to get the most tax-efficient strategy for taking money out. (I vaguely recall reading about strategies where you start taking benefits from just a handful of policies each year, using the tax-free lump sum to live on.)

Putting all new earnings into pension has the bonus advantage that that money is completely safe from an IR35 investigation.

Edit: Re-reading your post, I see you are already in the 40% bracket even without taking dividends. In that case, drawing down after retirement or the capital gains route for extracting the money might be better. The pension option for new earnings can still save you significant amounts of tax.

[castoff101]

Ok thanks for all the information IR35. Think I will investigate further.