What amount of dividends do you pay yourself?

[THEPUMA]

Ok, I really genuinely am trying to understand this. You're saying leave it in the company on the basis that in future, my circumstances may change, i.e. I'm out of work for a year, and then I can take it tax free? If so, again I can see the point.
Like you say, for the first 6 months of contracting, I was taking it out to pay off all my university debts, which I have now done. So that made sense to do at the time. And I don't forsee me being out of work for the next 3-5 years, after which point I may end up going back to being permie. But now I think we are getting into specifics of each individuals situation and overall I think that's the answer to the question - it depends what you're doing with the money and what the plan is for the future.

OK so if you go permie in 3-5 years time, at that time you will be able to dissolve the company and should be able to draw the money out of your company as capital rather than a dividend. Under the current capital gains tax regime, you would get the first £10K per shareholder out tax-free and the balance at 10%, as opposed to the minimum 25% you will pay now if you draw dividends in excess of the higher rate tax threshold.

So my recommendation to you would be to take however much you want to spend and leave the rest in the company as opposed to drawing it out and saving it personally as there is a chance you will save at least 15% tax in the long run by doing that.

PUMA

[psychocandy]

OK so if you go permie in 3-5 years time, at that time you will be able to dissolve the company and should be able to draw the money out of your company as capital rather than a dividend. Under the current capital gains tax regime, you would get the first £10K per shareholder out tax-free and the balance at 10%, as opposed to the minimum 25% you will pay now if you draw dividends in excess of the higher rate tax threshold.

So my recommendation to you would be to take however much you want to spend and leave the rest in the company as opposed to drawing it out and saving it personally as there is a chance you will save at least 15% tax in the long run by doing that.

PUMA

Really? I didnt know that.

I was always planning to leave the excess money in the company anyway - after all whats the point in taking out more in salary/dividends because you're in effect paying 40% on it.

So you're saying I could go 5 years, paying myself right up to the higher tax bracket every year? Then go permie, and take it all out first £10K free and then rest 10%?

Obviously, I'd have already paid CT on this amount but its still better than taking it out in previous years and paying higher rate?

Although, what if, say you're permie salary is already £45K. Doesnt this extra get taken into account as your years income? (Or is it considered already taxed at the 0%/10% thing?)

[Nixon Williams]

Be careful....

It is all very well to do some tax planning, but be aware that the tax rules in place at the moment, may not be in place in say five years time when you intend to implement your plan.

The current ESC C16 concession is unlikely to be around in 12 months time, let alone in 5 years. It seems likely that there will be a limit of £4,000 with the remainder to be distributed as dividends.

A way around this would be to have a voluntary liquidation, although this is more costly so the values would need to stack up.

Assuming that this is not a hurdle, and for most people it should not be, the plan of limited withdrawals to the 40% tax bracket and building up the cash is a common suggestion.

This plan then proceeds to wind up the company and take advantage of lower rates of capital gains tax. Currently these rates range from 10% to 28%.

The 10% is where you can take advantage of the entrepreneur’s relief (upto £10 million!), however this is only available to “trading” businesses. HMRC may contend that a company with a huge pile of cash is no longer a trading company and so the tax rate would rise to 28% is you are a higher rate tax payer. The rate would be 18% if you kept out of the higher rate tax bracket.

This compares to 25% is you take the funds out as dividends and avoid the £150,000 additional rate threshold.

The main risk that I see with this longer term tax planning is a reliance on the current rates of tax remaining at this level in the future. As far as I am aware both Labour and the Liberal Democrats have suggested higher rates of Capital Gains Tax, so you need to be aware of potential future problems with long term tax planning.

I hope this helps.

Alan

[Nixon Williams]

Obviously, I'd have already paid CT on this amount but its still better than taking it out in previous years and paying higher rate?

YES.

Although, what if, say you're permie salary is already £45K. Doesnt this extra get taken into account as your years income? (Or is it considered already taxed at the 0%/10% thing?)

The rates of capital gains tax, assuming entrepreneur's relief is not applicable is 18% if you are not a higher rate taxpayer and 28% if you are a higher rate taxpayer.

If the rules for entrepreneur's relief apply, then the rate is 10% irrespective of the income tax rate you pay.

Alan