Company retained profit in the long term

[youngguy]

I know this topic has been approached many times form the perspective of 'how do I get retained profits out my co' and the general agreement seems to be to either take the tax hit or leave it in whilst maximising legit expenses (eg pension) and closing the company at some point.

Many who are waiting to close appear to be nearing the end of their contracting lives and nearing retirement age.

I'm wondering about the younger generation of contractors. If someone is is on a decent dat rate (say £500) and draws up to the lower tax limit (£40ish…depending on the year) then it is quite possible to have £40K+ retained profit each year. If they start contracting young, they could end up with a business bank account of £800k-£1m before they even hit 50. Anyone in this position, if so, what is your plan, to just retire early and draw a salary from the co for 10 or so years without ever invoicing? Would that draw raised eyebrows from HMRC?

[northernladuk]

Your example isn't very realistic as you have forgotten about any kind of planning to make sure you don't end up with that amount in the bank. There are times people will draw more divis in a year because they can and there was the options for ER and shutting the company down. Now you can go though MVL and get the benefit from that. To contract that long and keep that amount of money locked up in the LTD is just not realistic and pretty stupid.

If you have done all the above it is highly likely that you are very comfortable and have already started winding down You also wouldn't have so much in the LTD to get upset and the prospect of the tax bill for getting the amount of money out you are proposing.

Better to rethink your example scenario in to something more realistic so then people can actually comment on viable and real methods of managing what is left.

I presume you are also new to contracting as well as young? Many of the assumptions (and many of the ones you missed) are very wrong.

[Martin at NixonWilliams]

I know this topic has been approached many times form the perspective of 'how do I get retained profits out my co' and the general agreement seems to be to either take the tax hit or leave it in whilst maximising legit expenses (eg pension) and closing the company at some point.

Many who are waiting to close appear to be nearing the end of their contracting lives and nearing retirement age.

I'm wondering about the younger generation of contractors. If someone is is on a decent dat rate (say £500) and draws up to the lower tax limit (£40ish…depending on the year) then it is quite possible to have £40K+ retained profit each year. If they start contracting young, they could end up with a business bank account of £800k-£1m before they even hit 50. Anyone in this position, if so, what is your plan, to just retire early and draw a salary from the co for 10 or so years without ever invoicing? Would that draw raised eyebrows from HMRC?

Based on current rules it would be fine to drawdown the income as dividends each year when the company stops trading. However, the rules could very different by then!

If you were to take the tax hit by closing the company there is a chance HMRC could question your company's status as a trading company with such a high level of cash on the balance sheet. If the money is inactive this may not be an issue, but I would certainly advise against actively managing the cash to earn investment income during this time.

I hope this helps.

Martin

[youngguy]

Your example isn't very realistic as you have forgotten about any kind of planning to make sure you don't end up with that amount in the bank. There are times people will draw more divis in a year because they can and there was the options for ER and shutting the company down. Now you can go though MVL and get the benefit from that. To contract that long and keep that amount of money locked up in the LTD is just not realistic and pretty stupid.

If you have done all the above it is highly likely that you are very comfortable and have already started winding down You also wouldn't have so much in the LTD to get upset and the prospect of the tax bill for getting the amount of money out you are proposing.

Better to rethink your example scenario in to something more realistic so then people can actually comment on viable and real methods of managing what is left.

WIth respect, I don't see how this is unrealistic?

I agree you could draw more in a year and take the tax hit, but I'm not aware of any other way to prevent build up of retained profit after legit expenses? Would be great if you could share these as many others may not know.

ER and shutting down are indeed valid...but only if you don't intend to contract again. But what about a 'career contractor' who doesn't want to pay over the odds tax and is still young (let's say mid forties) and is keeping their business running?

[youngguy]

Based on current rules it would be fine to drawdown the income as dividends each year when the company stops trading. However, the rules could very different by then!

If you were to take the tax hit by closing the company there is a chance HMRC could question your company's status as a trading company with such a high level of cash on the balance sheet. If the money is inactive this may not be an issue, but I would certainly advise against actively managing the cash to earn investment income during this time.

I hope this helps.

Martin

Interesting. So I guess the question is, is there a point at which a contractor should start thinking about 'managing' the retained profit (say a couple hundred thousand) and what are their options that DON'T include shutting the company. Is it just a case of draw more divi's and take the tax hit?

[kevpuk]

At some time, any retained money will need to be extracted. This is where I suppose timing comes in, to mitigate tax burden.
Should a Ltd build up these sorts of amounts, I would be thinking pension is s good place to start chucking funds - after all, that can be accessed reasonably early....

[GazCol]

I know this topic has been approached many times form the perspective of 'how do I get retained profits out my co' and the general agreement seems to be to either take the tax hit or leave it in whilst maximising legit expenses (eg pension) and closing the company at some point.

Many who are waiting to close appear to be nearing the end of their contracting lives and nearing retirement age.

I'm wondering about the younger generation of contractors. If someone is is on a decent dat rate (say £500) and draws up to the lower tax limit (£40ish…depending on the year) then it is quite possible to have £40K+ retained profit each year. If they start contracting young, they could end up with a business bank account of £800k-£1m before they even hit 50. Anyone in this position, if so, what is your plan, to just retire early and draw a salary from the co for 10 or so years without ever invoicing? Would that draw raised eyebrows from HMRC?

I think you've missed pension contributions from your calculations and, more importantly, not factored in having a non-working spouse at some point.

It's a fair question, but not involving the amounts you're discussing.

[Fred Bloggs]

At some time, any retained money will need to be extracted. This is where I suppose timing comes in, to mitigate tax burden.
Should a Ltd build up these sorts of amounts, I would be thinking pension is s good place to start chucking funds - after all, that can be accessed reasonably early....

Bear in mind that the rules for pension contributions are tightening too. From April 2014, you can "only" contribute £40k a year into a pension. Presently it is £50k. So even if maxing out pension contributions, a well paid contractor could still have a significant pot of money in the business.

[northernladuk]

ER and shutting down are indeed valid...but only if you don't intend to contract again. But what about a 'career contractor' who doesn't want to pay over the odds tax and is still young (let's say mid forties) and is keeping their business running?

Still wrong. You can do this from time to time at the end of the contract. Quite possible to say you don't want to contract and shut it down. A month later you get a gig and give it another go.

Not a tactic to use too often but not out of the question to do a few times over a 30 year contracting period.

You should also base your numbers on around a 45 weeks working year and include a couple of months bench time ever few years.

Also remember we stay under the limit so we don't pay tax on money we don't need at the moment. It isn't a hard stop. Why should you live a lifestyle at 40k a year when you have 100's of K sat in the bank. You work to live so leaving that amount of money in the account while you life a pretty frugal life is also silly. I would rather pay the excess tax and be happy than miss out on living just to keep some money in the LTD.

[stek]

I've been contracting (with the odd permie stint) since the early nineties when I was about 30-odd, had few breaks and I don't have that sort of money floating around!

Divorce, depression and ill thought out investments cleared a lot of it, illness some more and involvement in an LLP and a subsequent tax hit I never saw coming didn't help.

What I'm saying is nothing is linear, there are very few monetary boosts along the way but a lot that will eff things up.

My and my mate (the first 'other contractor' I met!) in around 1998 planned to both have 300k in the bank in a few years but continuing to live in Scotland and work in London - guess what, that never happened!