Reply to: 3 weeks left as contractor - can I MVL now?

[northernladuk]

Your accountant will advise the most tax efficient methods to extract your money. It's part of what you pay them for.

[katdan]

I guess, yeah. Would be surprised if that was viable for more than a tiny minority though.

Hello,

Hope everyone is keeping well.

My hubby and I own a LTD company (50/50 shares). I'm unemployed since Jan 2020, and currently looking for a perm role. My husband is working as a PAYE contractor via umbrella company since Apr 2020. We're thinking to close down the LTD.

I came across a few discussions on forum that LTD (employer) can contribute one lump sum to employee's pension (using the LTD's reserved fund) to reduce CT and CGT. We'll likely go down MVL route to close the LTD but will like to find out if using pension contribution will help to reduce amount of tax we have to pay, and potentially, we can go down to striking off the LTD option.

P/S: I do already have an employer pension scheme set up but only contribute £100 per month for the last 8 years.

Any thoughts?

Thanks in advance.

[gr4z]

Thanks for the advice chaps. I agree its not worth rushing into anything with everyone jumping ship with IR35 and in the interests of time before the end of the FY, I will wait until FY20-21 before any MVL.

I will have to take a dividend before the end of the FY, however, as I am starting my FTE in March, I assume any salary earnt in March will also count towards my total year salary and by SA will be affected. Could be tricky I guess.
I think it prudent to maximise my pension contributions before the end of the FY and then again next year as I have a buffer before the maximum contributions before any MVL.
I do have quite a large cash asset after 10 years contracting in my company, if I liquidate and ER still exists, do I get stung with any extra tax above and beyond ER/CGT?

Thanks again

[WordIsBond]

For that amount? Take extra dividends, or make extra pension contributions, before 5 April, to get under £27K. On 6 April, take a £2K div to take advantage of the dividend allowance, which gets you under £25K. Get final accounts filed, and strike the company off. You'll have a £25K capital gain.

If you have a spouse that is an equal shareholder, use £29K, because you'll both get £2K on 6 April. Your 25K capital gain will be taxed at almost nil in this case because each of you gets the cap gains allowance of £12K.

If you don't have a spouse shareholder, you'll have to pay CGT on £13K, unfortunately. I don't think there is any way to split the CG over two years on a striking off.

[CompoundOverload]

Thanks for this - think I will end up having about 30k in the business and was just going to do a MVL. I might actually think about just taking dividends now as the year progresses... might take the edge off getting an underpaid permie job if I have to later in the year (I'm taking a few months off).

Take dividends post April? Then you need to factor in any PAYE salary you receive because the income you earn PAYE pushes up your dividend tax to 32.5%, assuming you earn an OK salary.

[wicko27]

If they've retired, or taking a year or two away from work for some reason (eg full time parent), ie something which means they have negligible other income, then yes, dividends over a few years could make more sense.

Thanks for this - think I will end up having about 30k in the business and was just going to do a MVL. I might actually think about just taking dividends now as the year progresses... might take the edge off getting an underpaid permie job if I have to later in the year (I'm taking a few months off).

[Maslins]

What about making large pension contributions as salary sacrifice?
Taking low PAYE income and still extracting dividends? Is that possible?

I guess, yeah. Would be surprised if that was viable for more than a tiny minority though.

[Lance]

If the individual is now in PAYE/working via an umbrella, then they're likely to have significant personal income. Hence paying out dividends above the £2k dividend allowance, would quite probably already be in higher rate tax (so no 7.5% band left). Capital gains are independent of income.

If they've retired, or taking a year or two away from work for some reason (eg full time parent), ie something which means they have negligible other income, then yes, dividends over a few years could make more sense.

What about making large pension contributions as salary sacrifice?
Taking low PAYE income and still extracting dividends? Is that possible?

[Maslins]

If the individual is now in PAYE/working via an umbrella, then they're likely to have significant personal income. Hence paying out dividends above the £2k dividend allowance, would quite probably already be in higher rate tax (so no 7.5% band left). Capital gains are independent of income.

If they've retired, or taking a year or two away from work for some reason (eg full time parent), ie something which means they have negligible other income, then yes, dividends over a few years could make more sense.

[CompoundOverload]

Not really, though some are panicking re rumours of imminent entrepreneurs relief scrappage.

Also, when you saying "maxing the dividend allowance", that's currently just £2k so quite modest. Most people don't make many capital gains, so can be better to close a bit earlier, to get the first distribution this tax year, final one next tax year. Ie getting benefit of two years of CGT annual exemption of ~£12k each, rather than two years of dividend allowance of ~£2k each.

I should have been more clearer, I mean't up to the 7% divi tax allowance. Presumably, if you did go PAYE, after doing this capital distribution at the beginning of the tax year, you would simply pay the tax for the divs in Jan 2021 and the new tax code (factoring your dividends and new PAYE salary) would kick in from April 2021?

[adubya]

Perhaps by dividend allowance they meant the 7.5% rate up to the higher earnings threshold ? That's how I interpreted it anyway.

[Maslins]

If your intention is to close down your LTD and seek PAYE role(s), is there anything wrong with waiting until the new tax year, maxing the dividend allowance, close company and then start PAYE ?

I can't recall if I read it on here or somewhere else that this would cause an issue?

Not really, though some are panicking re rumours of imminent entrepreneurs relief scrappage.

Also, when you saying "maxing the dividend allowance", that's currently just £2k so quite modest. Most people don't make many capital gains, so can be better to close a bit earlier, to get the first distribution this tax year, final one next tax year. Ie getting benefit of two years of CGT annual exemption of ~£12k each, rather than two years of dividend allowance of ~£2k each.

[CompoundOverload]

If your intention is to close down your LTD and seek PAYE role(s), is there anything wrong with waiting until the new tax year, maxing the dividend allowance, close company and then start PAYE ?

I can't recall if I read it on here or somewhere else that this would cause an issue?

[Maslins]

Lots of people trying to rush into liquidation now. Combination of IR35 meaning Ltd Co work drying up,
and rumours about possible entrepreneurs relief changes in the budget making people panic they need to do it all ASAP.

Legally a company can enter liquidation whilst still trading. Or soon after, without lots of tidy up exercise being done first. However, both will realistically lead to significantly higher liquidator fees, as the liquidator then has to run your business for you for the final few weeks, and also do lots of your tax return type work too. Hence why most of the low cost online liquidators insist you get all that stuff done first, so their role is kept as small as possible (no collecting in/settling debts, negligible tax returns to submit etc).

[cojak]

The very first thing to do is to stop trading. Get all invoices out of the way first.

This shows you the process. Members Voluntary Liquidation Process | MVL Online

I would advice not starting MVL for 6 months after going permie. Then you can pick the company up again if things don’t work out.