Reply to: Minimise tax

[TykeMerc]

Apologies off topic - would our resident professional colleagues think it reasonable to charge a client in their first year of trading (ie naive) £150 to give this advice. To add insult to injury an additional £150 because the shareholding is split 60:40 between husband/wife ie director/director.

For the avoidance of doubt - there is some superb advice on this forum

It would depend how their service is structured and priced. As a Nixon Williams customer I pay an all inclusive annual price with unlimited advice, but I may be paying more than you are overall. That being said I feel I get value for money.

[FMCG]

If you take £30k as a dividend it needs to be grossed up by 10/9 for purposes of the income tax calculation = £33,333 plus £10k salary = £43,333 which exceeds the £41,865 HR Tax threshhold. If you take £28,500 as a dividends plus your £10k salary and thats the only income you have in this tax year, then you wont pay any tax.

Apologies off topic - would our resident professional colleagues think it reasonable to charge a client in their first year of trading (ie naive) £150 to give this advice. To add insult to injury an additional £150 because the shareholding is split 60:40 between husband/wife ie director/director.

For the avoidance of doubt - there is some superb advice on this forum

[Forbes Young]

That assumes that the next government do not make any major changes to tax system, especially the way dividends are taxed. i would consider taking all this tax year and suffer the extra tax, dividends could be a target if Labour get in. Labour like going for taxes increases on things people do not understand.

Very much doubt the tax rates etc will be worse in the next tax year. Governments set the next years rates months in advance rather than change things immediately - to do so would cause chaos. The tax allowances rarely go down overall and as I understand it for instance Income Tax Personal Allowance will increase to £10,600 for the 2015/16 tax year.
So I think you are being rather pessimistic about things here.

Graeme Bennett ACMA MBA

[eek]

That assumes that the next government do not make any major changes to tax system, especially the way dividends are taxed. i would consider taking all this tax year and suffer the extra tax, dividends could be a target if Labour get in. Labour like going for taxes increases on things people do not understand.

Why this tax year? You can't change tax rates retrospectively so any changes Labour implement would not start until April 2016. Even if they implemented them immediately after an election (and they can't and won't) anything taken in mid April 2015 would be subject to the current rules.

[Waldorf]

If you take £30k as a dividend it needs to be grossed up by 10/9 for purposes of the income tax calculation = £33,333 plus £10k salary = £43,333 which exceeds the £41,865 HR Tax threshhold. If you take £28,500 as a dividends plus your £10k salary and thats the only income you have in this tax year, then you wont pay any tax.
IE £28500 X 10/9 = £31,667 + £10K salary = £41,667.
Yes you are free to take £31,500 that remains as a dividend in the next tax year and if thats all your taxable income is in this tax year, you wont be liable for any income tax.

That assumes that the next government do not make any major changes to tax system, especially the way dividends are taxed. i would consider taking all this tax year and suffer the extra tax, dividends could be a target if Labour get in. Labour like going for taxes increases on things people do not understand.

[Forbes Young]

Can someone please tell me if there is something wrong with this approach to minimising tax:

Assume gross income £100K
Expenses £15K
Salary £10K

That leaves £75K to be taxed at 20% for corporation tax purposes, leaving £60K.

If in the 2014/15 tax year, I take £30K as dividends, (so that £30K + £10K = £40K is just below the lower tax band for income tax), that leaves £30K.

Now assuming I no longer work in 2015/16, can I take the remaining £30K without paying any tax?

If not, what is my best strategy (ASSUMING ALL ALONG I WILL NO LONGER WORK EVER AGAIN AFTER 5th April 2015)?

Thanks

If you take £30k as a dividend it needs to be grossed up by 10/9 for purposes of the income tax calculation = £33,333 plus £10k salary = £43,333 which exceeds the £41,865 HR Tax threshhold. If you take £28,500 as a dividends plus your £10k salary and thats the only income you have in this tax year, then you wont pay any tax.
IE £28500 X 10/9 = £31,667 + £10K salary = £41,667.
Yes you are free to take £31,500 that remains as a dividend in the next tax year and if thats all your taxable income is in this tax year, you wont be liable for any income tax.

[jamesbrown]

Yes I intend to retire for good, though I'm nowhere near retirement age and have no intention of claiming my basic state pension, now or ever.

My only quibble is this:

If I no longer work after April 5th 2015, whatever I have left in my bank account, can it be classed as dividends to take in the 2015/16 tax year, EVEN THOUGH THE COMPANY IS IN EXISTENCE BUT NOT TRADING (because I'm not going to work anymore)?

If instead I choose to close down the company, what rate is entrepreneurial tax, or do I not have to pay that either?

Sure, you can do that. If you have ~40k in distributable profits, take it as a dividend (or a salary/dividend combination if you wish: see above). There's no point in keeping the company open if you're retiring. If, after taking a final dividend, you have <25k left, you can take that as a capital distribution and have the company struck off. If you have >> 25k, you may want to consider a Members Voluntary Liquidation, which is a formal liquidation process (but cheaper/simpler; for example, see here, and I have no affiliation to this particular provider: Members Voluntary Liquidation | MVL Online®). Anyway, speak to your accountant, as they should be able to walk you through the options.

[EternalOptimist]

If a juicy contract came along offering 3k a day, my guess is that you would go back to work and take it.
So as long as the company is extant, neither you nor HMRC know that you will never work again.
In that case, drawing a low salary and paying dividends is ok imo.

and how many directors are paid 'gardening leave' when there is no intention of them ever working again ?

the law , as usual is a ass

[smileyface]

But in this case, there is nothing to indicate an extended period of not trading. If the OP doesn't work again this year, there is nothing to indicate that (s)he won't come back. £10k a year to fulfil the statutory obligations of a director isn't too high, IMHO.

"Over the past several months, the company has been reviewing whether to continue trading or to close down" - there's your evidence that you were doing something.

Yes I intend to retire for good, though I'm nowhere near retirement age and have no intention of claiming my basic state pension, now or ever.

My only quibble is this:

If I no longer work after April 5th 2015, whatever I have left in my bank account, can it be classed as dividends to take in the 2015/16 tax year, EVEN THOUGH THE COMPANY IS IN EXISTENCE BUT NOT TRADING (because I'm not going to work anymore)?

If instead I choose to close down the company, what rate is entrepreneurial tax, or do I not have to pay that either?

[jamesbrown]

Pragmatically speaking, if you have retained profit in a company, enough of your basic rate band left over and shutting down the company isn't an option, then I can't see any reason why you would choose to keep paying a salary over just taking dividends. Stopping the salary would mean you could unregister as an employer and you have one less thing (payroll) to deal with each year.

Yep. There's the issue of state benefits (notably a qualifying year for the state pension), but I'd still take the dividend in your scenario.

[TheCyclingProgrammer]

Agree with both of the above comments; it wouldn't be a consideration (in practice) unless this was over a protracted period. Also, I tend to be rather risk averse w/r to these things, so YMMV.

Pragmatically speaking, if you have retained profit in a company, enough of your basic rate band left over and shutting down the company isn't an option, then I can't see any reason why you would choose to keep paying a salary over just taking dividends. Stopping the salary would mean you could unregister as an employer and you have one less thing (payroll) to deal with each year.

[jamesbrown]

Agree with both of the above comments; it wouldn't be a consideration (in practice) unless this was over a protracted period. Also, I tend to be rather risk averse w/r to these things, so YMMV.

[TheCyclingProgrammer]

Since there is no trade, the salary cannot be "wholly and exclusively for the benefit of the trade", so you would lose any CT relief (e.g. to offset against passive income), aside from the question of what is reasonable.

I see exactly what you're saying, and I think I've even said the same thing on here myself but I've changed my view; while you still hold the legal role and responsibilities of company director, I think HMRC would be hard pressed to argue against a £10k salary. I think you would have to have a fairly extended period of no trade before HMRC might take an interest.

[TheFaQQer]

Speculative (and you can argue the same w/r to what is reasonable, but that doesn't help your case). Your last question misses the point. It will be blindingly obvious over an extended period and, more importantly, you wouldn't be able to show evidence, on request, that the company was actively trading. Since there is no trade, the salary cannot be "wholly and exclusively for the benefit of the trade", so you would lose any CT relief (e.g. to offset against passive income), aside from the question of what is reasonable.

But in this case, there is nothing to indicate an extended period of not trading. If the OP doesn't work again this year, there is nothing to indicate that (s)he won't come back. £10k a year to fulfil the statutory obligations of a director isn't too high, IMHO.

"Over the past several months, the company has been reviewing whether to continue trading or to close down" - there's your evidence that you were doing something.

[MarillionFan]

The company has ceased trading, since "ASSUMING ALL ALONG I WILL NO LONGER WORK EVER AGAIN AFTER 5th April 2015". Thereafter, based on intent alone, the company is liable to being designated a CIC. However, regardless of whether it is trading or actually run actively as a CIC, my question would be this: what is the purpose of the Director's remuneration? It is remuneration for their efforts in managing the company and soliciting work (or making investments in the case of a CIC). In other words, the salary must be reasonable and not purely reflect the existence of the office. I think it's tough to justify paying a salary indefinitely (i.e. for multiple years), including from a CIC where no investments are being made. So, the OP should pay the remaining profits as a dividend and have the company struck off or consider a capital distribution via an MvL IMHO.

That doesn't sound right to me. Just because the OP isn't contracting he can still draw a base salary.

The OP says he won't work again after this date. Assuming say retirement, then depending on pension payments then a capital redistribution versus salary / dividend maybe prudent, but without additional info hard to say.

Also if married he could income shift with his wife.