Reply to: How much of your dividends do you withdraw?

[pmeswani]

my accountants only advise that i pay myself a directors fee each week......but i work with other contractors who with different accountants advise use of paying min. wage and occasional divis......

what the best/consenus approach and pro and cons for each, if any?

Surely it depends on individual circumstances. How much can you afford to live on.

[diesel]

my accountants only advise that i pay myself a directors fee each week......but i work with other contractors who with different accountants advise use of paying min. wage and occasional divis......

what the best/consenus approach and pro and cons for each, if any?

[THEPUMA]

Interesting, but I would have thought you could only get away with this if you don't open another company and continue trading as before.

Well yes it is well-documented that if you close down a company and re-commence the same trade immediately through a new company that that is ineffective for CGT purposes but that would have applied both under the taper relief regime and the entrepreneurs' relief regime so nothing material has changed there.

[monkeygeorge]

The old rules were changed and replaced with entrepreneurs' relief.

Interesting, but I would have thought you could only get away with this if you don't open another company and continue trading as before.

[THEPUMA]

Wasn't this loophole abolished in April?

The old rules were changed and replaced with entrepreneurs' relief.

[monkeygeorge]

OK I got it, thanks.

[Lewis]

OK, so you take as much in dividends as you can to keep you below the threshold. So you leave the majority of the dividends in the company account forever to avoid paying tax? Eventually you’re going to withraw those funds, at which point you will exceed the threshold anyway, by a huge amount in one go as opposed to a smaller amount gradually. But the amount you pay in tax is the same, surely. This is what I don’t get.

You are assuming that you are earning at the same rate every year. If that is the case then yes you are right. The only point of keeping it in the company is if you anticipate being able to take it out at a lower tax rate later, examples include

(1) If you take an extended break from working
(2) If you are due to retire
(3) If you are planning on closing the company and wish to use special relief
(4) If you are unexpectedly sick and cannot work

Etc.. Etc..

If you want/need the money they just take it and pay the extra tax. If you can survive without it and want to take a punt that you might be able to get it out later at a lower tax rate then keep it there.

[NotAllThere]

I voted salary only - but that's cos there is no tax relief for dividends in Switzerland.

If I was in the UK, I'd take minimum salary for pension, the rest in dividends. And make sure that my contracts were "without IR35".

Any other approach is foolishness.

[monkeygeorge]

Yes you may be missing something. If you close the company after a year, you will probably get entrepreneurs' relief on the first £1million of lifetime gains (so £2m if you're married - there's no proposal for a CGT equivalent of the income shifting rules) meaning that the extraction cost will be <10% as opposed to 25% if taken by way of dividend on an arising basis.

Wasn't this loophole abolished in April?

[monkeygeorge]

In answer to both these questions. For dividends that do not put you into the higher rate bracket you have no additional tax to pay on self assessment. For the rest you need to pay additional tax at self assessment. So (a) is to avoid extra tax and (b) the consequences are you will pay extra tax.

OK, so you take as much in dividends as you can to keep you below the threshold. So you leave the majority of the dividends in the company account forever to avoid paying tax? Eventually you’re going to withraw those funds, at which point you will exceed the threshold anyway, by a huge amount in one go as opposed to a smaller amount gradually. But the amount you pay in tax is the same, surely. This is what I don’t get.

[ratewhore]

Lewis, as you say it's been debated before but the advice to restrict your dividends to quarterly is nonsense.

It's been debated to death. I currently take out most of my profit each month, leaving enough there to cover the company bills and a bit. Then I take what I have drawn and put most of it into a personal savings account to gain the interest.

At some point, there'll be enough there for me not to need to take it out monthly, but I'll see what I do when I get to that point.

And yes, I appreciate I will pay more tax annually doing it this way, but this is the path I have knowingly decided to take...

[THEPUMA]

I've heard mixed views on the best approach, however I see little benefit in keeping funds in your company, either you take the dividends and get taxed on a regular basis, or you take it some point in the future and get taxed heavily then?

I understand it's no longer possible to close your company after two years to withdraw the funds without incurring the tax.

Am I missing something, other then making yourself a target for a contractor working as a permie?

Yes you may be missing something. If you close the company after a year, you will probably get entrepreneurs' relief on the first £1million of lifetime gains (so £2m if you're married - there's no proposal for a CGT equivalent of the income shifting rules) meaning that the extraction cost will be <10% as opposed to 25% if taken by way of dividend on an arising basis.

The majority of my clients restrict their dividends to the amount they can take out as dividends without incurring higher rate tax although I suspect cashflow will not allow this to continue if we are unable to navigate our way around the income shifting rules come next April.

Lewis, as you say it's been debated before but the advice to restrict your dividends to quarterly is nonsense.

[Lewis]

i've had no advice on that from my accountant (i haven't asked, to be fair).

perhaps i'll, um, "amend" my minutes (with the aid of a box of matches)



i totally hear you, but going Ltd takes some getting used to and TBH i feel i'm doing a pretty good job so far! these frequent, small dividends i'm declaring are more down to a general sense of financial cautiousness than a lack of planning. some readjustment in my thinking probably required though.

You can take a tax free director's loan of up to £5K. Maybe bin the dividend minutes and instead put it in your accounts as a director's loan. Later declare a £5K dividend that clears the loan. But get advice from your accountant.

[Lewis]

But why not take it now and invest in a high interest account, rather than leave it in your company account. What good is it doing there?

What do you mean no further taxation consequences if you draw it at a later date?

In answer to both these questions. For dividends that do not put you into the higher rate bracket you have no additional tax to pay on self assessment. For the rest you need to pay additional tax at self assessment. So (a) is to avoid extra tax and (b) the consequences are you will pay extra tax.

[lambrini_socialist]

Wow! I've always been advised by my accountants to declare dividends at most quarterly to avoid them being classified as income. It's been debated here a few times as to whether monthly dividends are ok or not.

i've had no advice on that from my accountant (i haven't asked, to be fair).

perhaps i'll, um, "amend" my minutes (with the aid of a box of matches)

But jeez, can you not plan ahead a week!

i totally hear you, but going Ltd takes some getting used to and TBH i feel i'm doing a pretty good job so far! these frequent, small dividends i'm declaring are more down to a general sense of financial cautiousness than a lack of planning. some readjustment in my thinking probably required though.