Paying Ltd Company Dividend to Invest in a Personal ISA

[Joxer]

Morning all...

In the scenario where, after taking out salary and dividends / contributing to pension / setting aside funds for VAT and Corp Tax, my Ltd company has excess funds in the business bank account (earning no interest).

Does it always make sense financially to pay a dividend in order for me to contribute to an ISA (to the full amount) each year?

Or...are there situations where this is not advisable?

To get funds out of the Ltd company it will need to pay corporation tax on the dividends but is this outweighed by the tax-efficient nature of ISAs (and the fact that the principal plus interest is re-invested each year and hence "snowballs")...?

[Craig@Clarity]

Dividends are paid out of profits after corporation tax. Assuming you have taken salary and dividends up to the higher rate tax threshold, any further net dividend you take out of the company in this tax year will mean you need you set aside 25% of it for higher rate tax due by 31 Jan 2012.

My opinion is that unless the gain you received from the ISA is more than the 25% tax you pay on taking a dividend out of the company to fund it, it's not worth it.

[Joxer]

Dividends are paid out of profits after corporation tax. Assuming you have taken salary and dividends up to the higher rate tax threshold, any further net dividend you take out of the company in this tax year will mean you need you set aside 25% of it for higher rate tax due by 31 Jan 2012.

My opinion is that unless the gain you received from the ISA is more than the 25% tax you pay on taking a dividend out of the company to fund it, it's not worth it.

Given that an ISA is tax-free and compounds each year then surely the effective rate of return over a number of years is greater than the (annual) rates quotes (currently approx 2.8%)?

Has anyone done the sums and determined whether it's worth getting the funds out of a business bank account (and hence taking the hit on CT)?

[Craig@Clarity]

...... of a business bank account (and hence taking the hit on CT)?

Turnover less expenses = Profit. Profit is then subject to CT at 21% (currently). Profit after CT + retained profit brought forward from previous periods = where dividends are paid out of.

If you declare and pay a dividend, it doesn't reduce your profit and reduce the amount of CT due.

I'm assuming you mean "hence taking the hit on personal tax" rather than CT (which is corporation tax - tax on company profits)?

[Joxer]

Turnover less expenses = Profit. Profit is then subject to CT at 21% (currently). Profit after CT + retained profit brought forward from previous periods = where dividends are paid out of.

I'm on board with the above, cheers.

If you declare and pay a dividend, it doesn't reduce your profit and reduce the amount of CT due.

Agreed.

I'm assuming you mean "hence taking the hit on personal tax" rather than CT (which is corporation tax - tax on company profits)?

No, I did in fact mean corp tax. My rationale being there are a number of ways to using a Ltd company's retained earnings which are more tax-efficient than declaring a dividend (and paying CT)...

e.g. paying employee salary, contributing to a pension, applying for ESC16 (...which I appreciate is something which should be carefully considered)

Therefore declaring a dividend would be "taking a hit" in terms of using company funds for less tax-efficient purposes (...recognising that there's a limit to what can be done before taxation inevitably creeps in).

Cheers Craig.

[jmo21]

No, I did in fact mean corp tax. My rationale being there are a number of ways to using a Ltd company's retained earnings which are more tax-efficient than declaring a dividend (and paying CT)...

FFS..... you don't pay Corporation tax on a dividend!!

[Joxer]

FFS..... you don't pay Corporation tax on a dividend!!

I know I don't but I was under the impression that my Ltd company must...

"Small limited companies have to pay tax on dividends: currently, corporation tax is at 21 per cent, increasing to 22 per cent from April 2009. A small amount of relief is available if you do not distribute all your profits in the tax year"

Dividends tax explained | Startups

[prozak]

Therefore declaring a dividend would be "taking a hit" in terms of using company funds for less tax-efficient purposes (...recognising that there's a limit to what can be done before taxation inevitably creeps in).

Cheers Craig.

Craig is right on this one.

It is YOU who is taking the hit. Not the company.

You have up to 43875 to have in income this year until you start paying more tax on the dividend.

For this year tax is pretty simple. For most people the solution is:

i) Pay yourself a salary of at least £5,715.
ii) Increase this to £6,475 if your company’s profits
exceed £300,000.
iii) Pay any further sums you require as dividends

So is paying a dividend worth it to take the 25% hit?

I don't think so.

Santander Business Bank Account

2.75% for a 1 year Bond, from the first link I clicked on. Though has a high deposit limit. Alternatively switch your current account to Santander and get 5%.


Lets say you can get 3% interest tax free.

So to invest 5100 you need to pay yourself 6800.

At 3% compounded monthly it will take 115 months to get back to 6800.

If you earn .5% compounded monthly in your business account and lose 20% to tax. Then it will take 134 months to break even.

If you can manage a 2% before tax return for your company it then takes 249 months to break even.


Alternatively, others have discussed offsetting your company money against your own mortgage. This is a very grey area, so I have no advice on this.

[jmo21]

I know I don't but I was under the impression that my Ltd company must...

"Small limited companies have to pay tax on dividends: currently, corporation tax is at 21 per cent, increasing to 22 per cent from April 2009. A small amount of relief is available if you do not distribute all your profits in the tax year"

Dividends tax explained | Startups

Am I being daft? That paragraph makes no sense to me.

[Platypus]

Am I being daft? That paragraph makes no sense to me.

Seems to me the OP thinks that CT is paid as the div is paid.

To the OP, and as already explained, the company pays tax on profits, whether or not you later pay that as a dividend.

So, let's just say that the company has £100k profit in the bank and hasn't yet paid its CT. Then the company pays CT at 21% on the whole amount of money. That leaves £79k. You can pay your divs out of that money, thereby taking a second hit personally of 25% once you get into the high rate tax band.

Or to try to put it another way, the company pays CT on the money regardless of whether you take it as a dividend, not when you take it as a dividend.

Craig explained it correctly. I hope I've added some simplicity!