Originally posted by Fred Bloggs
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Pension contribution:-
Profit before pension contribution - £10,000
Pension contributions - £(10,000)
Therefore taxable profit - £NIL
Cash received:-
25% tax-free - £2,500
Balance (over a period of time) - £7,500
Tax on balance (assume at 20%) - £(1,500)
Net received - £8,500
Retained in company:-
Profit before pension contributions - £10,000
Pension contributions - £NIL
Therefore taxable profit - £10,000
Corporation tax @ 20% - £(2,000)
Net profit available for distribution - £8,000
If you opt for a capital liquidation, it is likely that there will be a further 10% tax to pay so you net £7,200.
If you draw out as tax free dividends (bearing in mind if you are married to a non-earner and neither of you have any income from outside the company, you should be able to draw out circa £76K per annum tax-free between you), then you would net £8,000.
So you are paying £500 (5%) or £1,300 (13%) extra, depending upon your circumstances, in order to have the cash up-front.
Personally, if I could draw it as tax-free dividends, I would definitely be happy to pay 5% in order to have the cash in my pocket rather than in a pension scheme. I would probably be prepared to pay 13% if I had to but obviously that would be a more marginal decision.
This example does not take account of tax-free growth nor of the fact that it is your gross that is being invested in the first place. This is both because the example would become far too complicated but also because I have assumed that the shareholder is close to retirement and therefore these issues are less material.
You would also need to bear in mind any additional accounting fees and administrative burden of continuing to run a company beyond retirement if you opted for the tax-free dividend over a number of years route.
PUMA
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