Taking Dividends over future years from prior profits

[SheLtd]

I have managed to accummulate £400k profit in my business over a number of years even after taking-out a small salary and the maximum dividends each year to minimize tax. And having paid all valid VAT and Corp tax.

I am approaching a stage in my career whereby I do not want to carry-on workimg on a full-time basis but do not want to close-down the company as I am likely to have some £25k income generated annually in to th business.

Effectively I could seek to liquidate the company but that would leave me with liquidation costs and no easy way of ensuring I continue to receive the £25k revenue each year.

My plan is to merely drain the company of the £400k over 7-8 years via minimum salary and maximum dividends(minimum tax).

My question is will I get grief from the taxman following this route and are there any other options available to me?

[northernladuk]

If you are generating 25K a year still isn't it going to take a lot longer than 7-8 years to withdraw 400K using allowable limits???

You have to remember that this tax thing is not a hard stop and shouldn't be maintained at the detriment to your lifestyle. Treat yourself to a couple of bumper years and pay a little bit of extra tax IMO.

[Nathan SJD Accountancy]

I have managed to accummulate £400k profit in my business over a number of years even after taking-out a small salary and the maximum dividends each year to minimize tax. And having paid all valid VAT and Corp tax.

I am approaching a stage in my career whereby I do not want to carry-on workimg on a full-time basis but do not want to close-down the company as I am likely to have some £25k income generated annually in to th business.

Effectively I could seek to liquidate the company but that would leave me with liquidation costs and no easy way of ensuring I continue to receive the £25k revenue each year.

My plan is to merely drain the company of the £400k over 7-8 years via minimum salary and maximum dividends(minimum tax).

My question is will I get grief from the taxman following this route and are there any other options available to me?

Hi,

I believe the following link will provide the exact and comprehensive answer you are looking for:

Tax issues for contractors who save large sums of money in their limited companies <url removed>

The short answer is yes, a salary and dividends may still be taken, but you need to be aware of how the company is portrayed if you are not trading through it. With the circa 25K still being received, are these investments or from trading?

[Nixon Williams]

I have managed to accummulate £400k profit in my business over a number of years even after taking-out a small salary and the maximum dividends each year to minimize tax. And having paid all valid VAT and Corp tax.

I am approaching a stage in my career whereby I do not want to carry-on workimg on a full-time basis but do not want to close-down the company as I am likely to have some £25k income generated annually in to th business.

Effectively I could seek to liquidate the company but that would leave me with liquidation costs and no easy way of ensuring I continue to receive the £25k revenue each year.

My plan is to merely drain the company of the £400k over 7-8 years via minimum salary and maximum dividends(minimum tax).

My question is will I get grief from the taxman following this route and are there any other options available to me?

You could liquidate and although this will incur an extra fee, it seems that this can be done for anything ranging from £1000 to £4000.

If you do liquidate, it is unlikely with the cash you have piled up, that you will qualify for entrepreneur's relief. This can be costly as instead of paying tax at 10%, you would in effect pay tax at 28%.

However, at 28% this is still less than the tax on dividends above £150K (36.1%) and even less than the new rate of 30.56% that comes in from April 2013.

If you keep below the £150K threshold, the extra dividend tax would be just 25% so you could extract this over say 2 years and then liquidate to pay 10% on the remainder.

You could continue to take a dividend and there is no issue with that for as long as you wish, however I would give a caution about such long term tax planning, it is all very well to plan such a plan now, but who knows how dividends will be taxed in 2016 after the next election?

I assume that there will still be some income from contracting over the next few year? In which case you will be able to pay a salary and receive tax relief on this.

As NLUK said, it will take you alot more than 7-8 years to extract £400K if you keep under the 40% threshold and you continue to earn £25K per annum.

Alan

[SheLtd]

Please clarify?

You could liquidate and although this will incur an extra fee, it seems that this can be done for anything ranging from £1000 to £4000.

If you do liquidate, it is unlikely with the cash you have piled up, that you will qualify for entrepreneur's relief. This can be costly as instead of paying tax at 10%, you would in effect pay tax at 28%.However, at 28% this is still less than the tax on dividends above £150K (36.1%) and even less than the new rate of 30.56% that comes in from April 2013.

If you keep below the £150K threshold, the extra dividend tax would be just 25% so you could extract this over say 2 years and then liquidate to pay 10% on the remainder.

You could continue to take a dividend and there is no issue with that for as long as you wish, however I would give a caution about such long term tax planning, it is all very well to plan such a plan now, but who knows how dividends will be taxed in 2016 after the next election?

I assume that there will still be some income from contracting over the next few year? In which case you will be able to pay a salary and receive tax relief on this.

As NLUK said, it will take you alot more than 7-8 years to extract £400K if you keep under the 40% threshold and you continue to earn £25K per annum.

Alan

Why would I not qualify for ER just because there is £400k remaining in the company. I thought the ER threshold is £1m=?

[Nixon Williams]

Why would I not qualify for ER just because there is £400k remaining in the company. I thought the ER threshold is £1m=?

The ER threshold is now £10 million!

To qualify for ER amongst other things you have to be a trading company, with as much cash as you have, it is likely/possible that HMRC will challenge that you are in fact an investment company.

There are no fixed rules on this but the general consensus is that cash upto £100K will be ok, above that you are less certain of gaining ER.

It all depends on the company, obviously a large trading company with a turnover of say £20million could easily have £400K in cash but for most contractors, this amount of cash could be deemed to be excessive.

Alan

[ASB]

Why would I not qualify for ER just because there is £400k remaining in the company. I thought the ER threshold is £1m=?

I think there are 2 possible issues to consider.

-The risk of the company becoming a close investment company and being taxed at 28%. This risk could become very real, especially as you wind down the trading activities. There isn't really any hard and fast rule but with 400k on deposit or invested there could be issues with the level of income this is generated compared with the profit produced by the trading activities.

- In terms of ER there are concerns about high levels of cash not being eligible. Part of the problem is that the regimes is designed to relieve business assets - i.e. those actively used in furtherance of the trade. If you have built up this substantial sum over a number of years then this is a potential argument that it is not used for trade and is therefore ineligible.

[primroselp]

Treat yourself to a couple of bumper years and pay a little bit of extra tax IMO.

Mod note: Image removed. Not in the Professional forums please.

[philip@wellwoodhoyle]

Don't assume that there won't be changes to tax on dividends.

Your plan to take dividends over several years is sound as long as the tax regime doesn't change over that time period.

It hasn't for about a decade or so, but who knows what the future will bring?

Company tax and dividends are now well up on the radar after Ken Livingston, BBC presenters, etc, and could well be a target for a future Budget.

There seems to be a trend for going back to how things were in the tax world, so what would happen if they brought back advance corporation tax? That's 25% of the gross dividend payable quarterly with the dividends - only off-settable against corporation tax - if the company wasn't liable to CT (i.e. no or little trading income), there'd be no offset! Nasty!!

Or how about NIC charges on dividends?

Or even worse things that we can't even think of today?

[Contreras]

Might be worth considering using a pension if you have not already done so - It depends on circumstances, current age, previous year's profits, existing pension arrangements etc., but worth taking professional advice on.

E.g. your company contributes £200k into a pension for you (using up previous year's allowances), then up to £50k/yr in the following years. At age 55 you then take 25% (£100k) lump sum tax free, and the remainder in flexible drawdown taxed as income.

The company is still trading (£25k revenue pa.), but the pension contributions are a business expense so the company would actually be making a loss and so potentially expect a corporation tax refund on these losses further reducing the overall tax bill.

You need to show £20k/pa pension income to qualify the pension for flexible drawdown. Not sure if the company's £25k revenue would already qualify for this, again worth checking.