Drawing dividends over higher tax threshold - should I?

[d000hg]

If you're not going to end up with low years, you're going to have to take it out eventually.

[Moscow Mule]

Don't forget that if you take a big divi this year resulting in a big tax liability you will have to pay that liability + 50% in January next year for your "Payment on account".

[ASB]

Don't forget that if you take a big divi this year resulting in a big tax liability you will have to pay that liability + 50% in January next year for your "Payment on account".

True, but you can appeal the POA down to nil if it is appropriate for the revised circumstances (i.e. the higher rate tax is not anticipated). Of course if the situation subsequently changes and the POA should actually have been made interest is chargeable on the non payment.

[kingcook]

If you're not going to end up with low years, you're going to have to take it out eventually.

Or retire early

[JoJoGabor]

I keep a lump sum in the business account as a war chest but take everything else out. It's painful taking a 40% hit but I am young and figure I have another 15 years of this. So I can leave it in the account earning nothing for 15 years then drip feed it out when I am probably earning less, or take it out and earn say 5% a year, so over 15 years that will earn me more than the tax I will pay now.

[FRS]

I keep a lump sum in the business account as a war chest but take everything else out. It's painful taking a 40% hit but I am young and figure I have another 15 years of this. So I can leave it in the account earning nothing for 15 years then drip feed it out when I am probably earning less, or take it out and earn say 5% a year, so over 15 years that will earn me more than the tax I will pay now.

I think thats the biggest point that some people miss. If you take it out now and put it in an ISA making 7% a year, then in 15 years you've more than covered the initial 25% tax hit. It all depends on what you do with it and how far you are from retiring, if you're close to retiring then putting it a SIPP / leaving it in the company probably makes more sense. There's no hard fast rule for this, it depends on your circumstances. However having a warchest in the company is a good idea if you wish to remain a contractor in the long term.

[psychocandy]

Thanks, all - I appreciate your responses.

I'm lucky enough to have just secured a role for the next 12 months, again at a reasonable daily rate, so, if I left the net profit in the company, I'm likely to end up with a decent war chest by the end of FY 12/13. As I see it, this war chest only becomes useful if I become ill, cannot get employment after FY12/13 or cannot work for any other reason. It seems there are three options: pension; war chest; or dividend - and, with a mortgage to pay off, I'm really tempted to take a lump sum, take the tax hit and pay off the mortgage this year.

I'll dwell further, and change my mind a hundred times no doubt! Thank you - further advice well received here!

Yeh. Pretty much.

Do you currently split dividends with wife/partner? For some people, this is worth doing (depending on wifes current income) because it means you can arrange it to pay dividends up to the tax bracket for both of you.

For instance, example :-

50/50 share split.

You salary = £7000
Mrs salary = £10000 (from her own job for example)

OK. So upper limit is approx £44K.

In this example, apart from paying yourself £7K you could draw another £68K out of the company in dividends (£34K) with neither of you exceeding the tax bracket.

Of course, assumes you trust your mrs and she aint gonna knob the milkman and disappear with your £34K.

[d000hg]

Or retire early

But your company would be still paying you after you 'retire' meaning you're still employed?

[Notascooby]

You could take the divs without a salary - but you may as well stay employed and tax the 7K tax free.

Unless that affects other tax calulations due to pensions etc. Unfortunately I've neither the reserves nor the chance to pack this in to have given it much thought...

so this is a bit of a non-post then...

[northernladuk]

so this is a bit of a non-post then...

Thanks for that