Reply to: Retained profit in the next financial year

[derekM]

At the start of each financial year "last year's retained profit" becomes the opening balance for the new year's retained profit. Therefore there's no need to keep referring to "last years retained profit"... you simply look at retained profit now and draw your dividends against that.

QB.

smashing, thanks!

[QwertyBerty]

And further to this, is it fair to say, in any given year, dividends can be extracted from "last years retained profit" + "this years profit"

At the start of each financial year "last year's retained profit" becomes the opening balance for the new year's retained profit. Therefore there's no need to keep referring to "last years retained profit"... you simply look at retained profit now and draw your dividends against that.

QB.

[Stag Cozier]

What insurances are you talking about? my company already pays for various professional insurances.

Nope, don't want company reclassified as an investment vehicle.

Life insurance. As a possibility you could also consider critical and sick pay packages (although, these will create a benefit in kind issue unless the company is the beneficiary).

It's unlikely that your company will be classed as an investment vehicle unless you plan to investment more than 20%.

[pmeswani]

Im not sure if you have misunderstood something there.

There are no additional taxes to pay if you are a basic rate tax payer as the corp tax you will already have paid on the profits retained or otherwise.

My apology, you are indeed correct. I was primarily looking at the response from the business tax point of view, rather than from a personal tax point of view.

[derekM]

Here are somethings to think about:

1. Are you married and does your spouse have employment income or is she a housewife (possibility of paying her divi's)

Well aware, but do not want to go down income shifting route.

2. Insurances (can your company pay for the premiums - Speak to your FA or accountant)

What insurances are you talking about? my company already pays for various professional insurances.

3. Nothing stopping you taking more money out of the company as divi's if you need it. Just make sure you are aware of the personal tax implications.

4. If you don't need to go into the higher rate tax bracket leave it in the company, roll it over to the next tax year.

Well aware of these, mentioned them in my post - I was asking how retained profits are factored into the following years calculations.

5. Can your company make investments? Stocks, bonds, gold, property etc...

Nope, don't want company reclassified as an investment vehicle.

6. Can you increase your pension contributions? Speak to your provider

Not planning to!

Thanks for putting so much thought into your post, much appreciated!

[escapeUK]

I learn something new every day. If there is no corp tax to pay on retain profits, then I agree with this view.

Im not sure if you have misunderstood something there.

There are no additional taxes to pay if you are a basic rate tax payer as the corp tax you will already have paid on the profits retained or otherwise.

[Stag Cozier]

Here are somethings to think about:

1. Are you married and does your spouse have employment income or is she a housewife (possibility of paying her divi's)

2. Insurances (can your company pay for the premiums - Speak to your FA or accountant)

3. Nothing stopping you taking more money out of the company as divi's if you need it. Just make sure you are aware of the personal tax implications.

4. If you don't need to go into the higher rate tax bracket leave it in the company, roll it over to the next tax year.

5. Can your company make investments? Stocks, bonds, gold, property etc...

6. Can you increase your pension contributions? Speak to your provider

[Nixon Williams]

And further to this, is it fair to say, in any given year, dividends can be extracted from "last years retained profit" + "this years profit"

The simple answer is yes!

However there are some examples where you may not have the cash in the company to payout all the retained profit as a dividend.

A simple example would be if you had say retained profits of £100,000 but had splashed out £25K on a company car, although the profits would still show at £100K, the cash available would now only be £75K - a simple example but hopefully it shows that profits are not always the same as cash in the bank!

Hope this helps.

Alan

[derekM]

So it appears you are saying I can simply pay out the retained profit as dividends which simply counts towards my earnings in the new tax year? Seems simple enough if that is the case, is my understanding correct?

And further to this, is it fair to say, in any given year, dividends can be extracted from "last years retained profit" + "this years profit"

[derekM]

Ok. I don't know how much (nor do I want to know) you have in your business, but unless it exceeds the annual limit, you can put in as much employer contributions as you like. (And if I am wrong, apologies in advance!).

Personally I wouldn't close down the business unless there were no other alternatives. If your accountant does recommend taking out dividends, then providing there is no additional corp tax (or any other tax) to pay, then go for it.

I don't know the rules and regs about buying property through the business (for example buy-to-let or commercial property), but maybe that could be an option (especially if you have enough money in the bank to pay for the it)?

I don't know if this would help with IR35 at all (Having more than 1 client, etc). I know someone who has property on his business books, don't know the ins and outs myself.

Maybe an idea you may want to discuss with your accountant?

Yeah, well aware of SIPP rules, and as I said in intial post, this thread came about after some stilted information from one of his minions.

[pmeswani]

Gotta respect that. More effort in an amusing post that most of us seasoned guys can do. Love it.

Question I would ask first of all is... 'Do you need this money?' if not why not just let it accumulate. There will be a time where are not earning for one reason or another, you can then continue to divi yourself even though you are not earning to balance it out in the future. If not it just accumulates until you do decide to shut the company down and claim it.

I can't see much reason to worry about it unless you need it. There have been many discussion about investing it, paying off mortgages etc etc and at the moment all these seem to come to nothing for one reason and another.
I have just left it for a rainy day to be honest.

I learn something new every day. If there is no corp tax to pay on retain profits, then I agree with this view.

[pmeswani]

I already do pay employer contribs into a SIPP, but not quite that much !!

Ok. I don't know how much (nor do I want to know) you have in your business, but unless it exceeds the annual limit, you can put in as much employer contributions as you like. (And if I am wrong, apologies in advance!).

Personally I wouldn't close down the business unless there were no other alternatives. If your accountant does recommend taking out dividends, then providing there is no additional corp tax (or any other tax) to pay, then go for it.

I don't know the rules and regs about buying property through the business (for example buy-to-let or commercial property), but maybe that could be an option (especially if you have enough money in the bank to pay for the it)?

I don't know if this would help with IR35 at all (Having more than 1 client, etc). I know someone who has property on his business books, don't know the ins and outs myself.

Maybe an idea you may want to discuss with your accountant?

[derekM]

Gotta respect that. More effort in an amusing post that most of us seasoned guys can do. Love it.

Question I would ask first of all is... 'Do you need this money?' if not why not just let it accumulate. There will be a time where are not earning for one reason or another, you can then continue to divi yourself even though you are not earning to balance it out in the future. If not it just accumulates until you do decide to shut the company down and claim it.

Ok, so yes, I think I'd probably like to get at least some out - it's not desperate or anything, but knocking a large chunk off my mortgage would be nice!

That aside, your statement "continue to divi yourself even though you are not earning to balance it out in the future" intrigues me.

So it appears you are saying I can simply pay out the retained profit as dividends which simply counts towards my earnings in the new tax year? Seems simple enough if that is the case, is my understanding correct?

many thanks for all the answers by the way!

[Platypus]

This year, I'll calculate Invoiced - expenses, figure out my corp tax owed and have a figure, X that is available for dividends, but where does last years remainder fit?

I'm not an accountant, so don't know all the terminology, but it will sit in the company as retained profit. It won't be used to calculate corporation tax due (because it's already had tax paid on it), nor turnover and so on. It will essentially be invisible as far as this year's accounts are concerned.

i.e. it won't feature on the Profit & Loss, but rather it's a line on the Balance Sheet (the cash is a company asset).

[northernladuk]

First post, please be gentle (I'll answer all gladiator, chutney type newbie questions in General next!)

Gotta respect that. More effort in an amusing post that most of us seasoned guys can do. Love it.

Question I would ask first of all is... 'Do you need this money?' if not why not just let it accumulate. There will be a time where are not earning for one reason or another, you can then continue to divi yourself even though you are not earning to balance it out in the future. If not it just accumulates until you do decide to shut the company down and claim it.

I can't see much reason to worry about it unless you need it. There have been many discussion about investing it, paying off mortgages etc etc and at the moment all these seem to come to nothing for one reason and another.
I have just left it for a rainy day to be honest.