Reply to: Paying Ltd Company Dividend to Invest in a Personal ISA

[jamesbrown]

I think it should be 4X/3, so N = 9.7, when rate = 3%

Correct, it is log (4/3) / log 1.03 = 9.73 years.

[MrRobin]

Dunno. So I take out £X and put it in an ISA at 3%. For this I have to pay X/4 in personal tax?
After N years, you have X*(1.03^N). When X*(1.03^N) = 5X/4 your interest gained equals the original tax paid. Which I think gives solving 1.03^N = 1.25, which has a solution at N = 7.5 years.

That was fun, wonder if it's accurate

I think it should be 4X/3, so N = 9.7, when rate = 3%

[JoJoGabor]

This is exactly the point I was trying to make and so asking the approach other have;

i.e. do you commonly remain under the 43k and continually retain the excess in the business.

I cant see that im going to do this as ive higher spending expectations, holidays, property, cars etc. Im not saying spend it all but am I the only one taking dividents of say £50k some years?

Nope, I take the lot and spend spend spend!!! Now where's that Ivory back scratcher?

[d000hg]

Given that an ISA is tax-free and compounds each year then surely the effective rate of return over a number of years is greater than the (annual) rates quotes (currently approx 2.8%)?

Has anyone done the sums and determined whether it's worth getting the funds out of a business bank account (and hence taking the hit on CT)?

Dunno. So I take out £X and put it in an ISA at 3%. For this I have to pay X/4 in personal tax?
After N years, you have X*(1.03^N). When X*(1.03^N) = 5X/4 your interest gained equals the original tax paid. Which I think gives solving 1.03^N = 1.25, which has a solution at N = 7.5 years.

That was fun, wonder if it's accurate

[Barley]

If you keep it in your business account until retirement then keep your income below the £43k odd threshold each year, there will be no more tax to pay right?

This is exactly the point I was trying to make and so asking the approach other have;

i.e. do you commonly remain under the 43k and continually retain the excess in the business.

I cant see that im going to do this as ive higher spending expectations, holidays, property, cars etc. Im not saying spend it all but am I the only one taking dividents of say £50k some years?

[Waldorf]

Yes if that's your strategy then that is certainly the most efficient, but it's a long old game and remember that tax laws can change over time so be mindful

I agree with that, politicians of all colours are looking at increasing taxes, so be careful, who would have predicted a 50% tax rate 5 years ago?

[MrRobin]

If you keep it in your business account until retirement then keep your income below the £43k odd threshold each year, there will be no more tax to pay right?

Yes if that's your strategy then that is certainly the most efficient, but it's a long old game and remember that tax laws can change over time so be mindful

[minstrel]

An option could be Venture Capital Trusts (VCT's)? - these are certainly higher risk that a standard 'stocks & shares' ISA but there is upfront tax relief available.

Say you declare a dividend for £10,000 of which you invest £8,333 in a VCT.

The higher rate tax would be 25%, ie £2,500 but you would receive 30% tax relief on the investment of £2,500 so there would be no change on your overall tax bill.

You would also have £1,667 to spend as you wished!

Assuming all goes well with the VCT company, in five years’ time you will get your £8,333 back, free of tax – any gains made from the growth of the VCT, as well as any dividends paid out, are free of tax.

VCT's should really only be considered by the more sophisticated investor as the risks are certainly higher and should only form part of an overall investment portfolio.

Alan

+1

You could also consider EIS investments which have similar tax breaks, but only need to be held for 3 years.

[JoJoGabor]

That's the flaw in your argument... unless you plan to give up work then in what circumstances will you have no further tax to pay? You will have to pay the 25% div tax at some point...

If you keep it in your business account until retirement then keep your income below the £43k odd threshold each year, there will be no more tax to pay right?

[jamesbrown]

Given that an ISA is tax-free and compounds each year then surely the effective rate of return over a number of years is greater than the (annual) rates quotes (currently approx 2.8%)?

Has anyone done the sums and determined whether it's worth getting the funds out of a business bank account (and hence taking the hit on CT)?

You mean the number of years of compound annual interest at 2.8% to receive 125% of the original amount? That is: log 1.25/log 1.028 = 8 years.

Edit...except the CT would be taken out of the invested amount to start with, which means you would need an effective rate over T years of 1/0.75=1.333 not 1.25, so log 1.333/log 1.028 = 10.5 years to break even, assuming that you could notionally extract without any tax if deferred to some future date (of course, you have to take the money out at some point, so a comparison to the basic rate of CT in lean years may make more sense).

[MrRobin]

(assuming you have no further tax to pay when you finally take it out)

That's the flaw in your argument... unless you plan to give up work then in what circumstances will you have no further tax to pay? You will have to pay the 25% div tax at some point...

[JoJoGabor]

OK take 2...

Using the power of excel I've tried to work it out. Assuming a personal ISA is paying 3% and you can find a business bond also paying 3%, it shows its always better to leave the money in the business account (assuming you have no further tax to pay when you finally take it out)

Amount 1000.00
Interest Rate 0.03 0.03
Take as dividend Leave in business account
Net 750.00 1000.00
End of Year 1 772.50 1024.00
End of Year 2 795.68 1048.58
End of Year 3 819.55 1073.74
End of Year 4 844.13 1099.51
End of Year 5 869.46 1125.90
End of Year 6 895.54 1152.92
End of Year 7 922.41 1180.59
End of Year 8 950.08 1208.93
End of Year 9 978.58 1237.94
End of Year 10 1007.94 1267.65
End of Year 11 1038.18 1298.07
End of Year 12 1069.32 1329.23
End of Year 13 1101.40 1361.13
End of Year 14 1134.44 1393.80
End of Year 15 1168.48 1427.25
End of Year 16 1203.53 1461.50
End of Year 17 1239.64 1496.58
End of Year 18 1276.82 1532.50
End of Year 19 1315.13 1569.28
End of Year 20 1354.58 1606.94
End of Year 21 1395.22 1645.50
End of Year 22 1437.08 1685.00
End of Year 23 1480.19 1725.44
End of Year 24 1524.60 1766.85
End of Year 25 1570.33 1809.25

However if you could get a higher yield from stocks or property or Wonga.com equivalents, say 5% the figures look like this:

Amount 1000.00
Interest Rate 0.05 0.03
Take as dividend Leave in business account
Net 750.00 1000.00
End of Year 1 787.50 1024.00
End of Year 2 826.88 1048.58
End of Year 3 868.22 1073.74
End of Year 4 911.63 1099.51
End of Year 5 957.21 1125.90
End of Year 6 1005.07 1152.92
End of Year 7 1055.33 1180.59
End of Year 8 1108.09 1208.93
End of Year 9 1163.50 1237.94
End of Year 10 1221.67 1267.65
End of Year 11 1282.75 1298.07
End of Year 12 1346.89 1329.23
End of Year 13 1414.24 1361.13
End of Year 14 1484.95 1393.80
End of Year 15 1559.20 1427.25
End of Year 16 1637.16 1461.50
End of Year 17 1719.01 1496.58
End of Year 18 1804.96 1532.50
End of Year 19 1895.21 1569.28
End of Year 20 1989.97 1606.94
End of Year 21 2089.47 1645.50
End of Year 22 2193.95 1685.00
End of Year 23 2303.64 1725.44
End of Year 24 2418.82 1766.85
End of Year 25 2539.77 1809.25

So I would say if you can get a yield of 5% or more using your personal money and its 12 or more years before you retire, take it all out of the business. Otherwise leave it in.

[Nixon Williams]

Would appreciate some advice..

Ive been doing fairly well recently and as such accruing a nice buffer in my company account (enough for say a 2-3 year warchest).

Assuming this continues and that I want to enjoy the fruits of my labour (beyond the 43875 tax threshold) is there is no other way of getting money out of the company except taking the 25% tax hit (aside from liquidating & restaring another business, which I dont want to do).

I guess my question is really about how others in my situation deal with the excess, if for example youve a £100k net profit per year are you just leaving money to accumlate in the business acount/business deposit account or are you taking money out for better living standards and paying higher rate tax?

An option could be Venture Capital Trusts (VCT's)? - these are certainly higher risk that a standard 'stocks & shares' ISA but there is upfront tax relief available.

Say you declare a dividend for £10,000 of which you invest £8,333 in a VCT.

The higher rate tax would be 25%, ie £2,500 but you would receive 30% tax relief on the investment of £2,500 so there would be no change on your overall tax bill.

You would also have £1,667 to spend as you wished!

Assuming all goes well with the VCT company, in five years’ time you will get your £8,333 back, free of tax – any gains made from the growth of the VCT, as well as any dividends paid out, are free of tax.

VCT's should really only be considered by the more sophisticated investor as the risks are certainly higher and should only form part of an overall investment portfolio.

Alan

[Barley]

Well I guess I dont get the jist of the common responses by people which often implies they leave excess money in the company account and draw up to the £43k threshold.

Does this mean everyones sitting on piles of cash in business accounts and not drawing it?

[Support Monkey]

Would appreciate some advice..

Ive been doing fairly well recently and as such accruing a nice buffer in my company account (enough for say a 2-3 year warchest).

Assuming this continues and that I want to enjoy the fruits of my labour (beyond the 43875 tax threshold) is there is no other way of getting money out of the company except taking the 25% tax hit (aside from liquidating & restaring another business, which I dont want to do).

I guess my question is really about how others in my situation deal with the excess, if for example youve a £100k net profit per year are you just leaving money to accumlate in the business acount/business deposit account or are you taking money out for better living standards and paying higher rate tax?