Reply to: What amount of dividends do you pay yourself?

[Nixon Williams]

Obviously, I'd have already paid CT on this amount but its still better than taking it out in previous years and paying higher rate?

YES.

Although, what if, say you're permie salary is already £45K. Doesnt this extra get taken into account as your years income? (Or is it considered already taxed at the 0%/10% thing?)

The rates of capital gains tax, assuming entrepreneur's relief is not applicable is 18% if you are not a higher rate taxpayer and 28% if you are a higher rate taxpayer.

If the rules for entrepreneur's relief apply, then the rate is 10% irrespective of the income tax rate you pay.

Alan

[Nixon Williams]

Be careful....

It is all very well to do some tax planning, but be aware that the tax rules in place at the moment, may not be in place in say five years time when you intend to implement your plan.

The current ESC C16 concession is unlikely to be around in 12 months time, let alone in 5 years. It seems likely that there will be a limit of £4,000 with the remainder to be distributed as dividends.

A way around this would be to have a voluntary liquidation, although this is more costly so the values would need to stack up.

Assuming that this is not a hurdle, and for most people it should not be, the plan of limited withdrawals to the 40% tax bracket and building up the cash is a common suggestion.

This plan then proceeds to wind up the company and take advantage of lower rates of capital gains tax. Currently these rates range from 10% to 28%.

The 10% is where you can take advantage of the entrepreneur’s relief (upto £10 million!), however this is only available to “trading” businesses. HMRC may contend that a company with a huge pile of cash is no longer a trading company and so the tax rate would rise to 28% is you are a higher rate tax payer. The rate would be 18% if you kept out of the higher rate tax bracket.

This compares to 25% is you take the funds out as dividends and avoid the £150,000 additional rate threshold.

The main risk that I see with this longer term tax planning is a reliance on the current rates of tax remaining at this level in the future. As far as I am aware both Labour and the Liberal Democrats have suggested higher rates of Capital Gains Tax, so you need to be aware of potential future problems with long term tax planning.

I hope this helps.

Alan

[psychocandy]

OK so if you go permie in 3-5 years time, at that time you will be able to dissolve the company and should be able to draw the money out of your company as capital rather than a dividend. Under the current capital gains tax regime, you would get the first £10K per shareholder out tax-free and the balance at 10%, as opposed to the minimum 25% you will pay now if you draw dividends in excess of the higher rate tax threshold.

So my recommendation to you would be to take however much you want to spend and leave the rest in the company as opposed to drawing it out and saving it personally as there is a chance you will save at least 15% tax in the long run by doing that.

PUMA

Really? I didnt know that.

I was always planning to leave the excess money in the company anyway - after all whats the point in taking out more in salary/dividends because you're in effect paying 40% on it.

So you're saying I could go 5 years, paying myself right up to the higher tax bracket every year? Then go permie, and take it all out first £10K free and then rest 10%?

Obviously, I'd have already paid CT on this amount but its still better than taking it out in previous years and paying higher rate?

Although, what if, say you're permie salary is already £45K. Doesnt this extra get taken into account as your years income? (Or is it considered already taxed at the 0%/10% thing?)

[THEPUMA]

Ok, I really genuinely am trying to understand this. You're saying leave it in the company on the basis that in future, my circumstances may change, i.e. I'm out of work for a year, and then I can take it tax free? If so, again I can see the point.
Like you say, for the first 6 months of contracting, I was taking it out to pay off all my university debts, which I have now done. So that made sense to do at the time. And I don't forsee me being out of work for the next 3-5 years, after which point I may end up going back to being permie. But now I think we are getting into specifics of each individuals situation and overall I think that's the answer to the question - it depends what you're doing with the money and what the plan is for the future.

OK so if you go permie in 3-5 years time, at that time you will be able to dissolve the company and should be able to draw the money out of your company as capital rather than a dividend. Under the current capital gains tax regime, you would get the first £10K per shareholder out tax-free and the balance at 10%, as opposed to the minimum 25% you will pay now if you draw dividends in excess of the higher rate tax threshold.

So my recommendation to you would be to take however much you want to spend and leave the rest in the company as opposed to drawing it out and saving it personally as there is a chance you will save at least 15% tax in the long run by doing that.

PUMA

[Wanderer]

I don't forsee me being out of work for the next 3-5 years, after which point I may end up going back to being permie.

Ahh, I wish I could have forseen all the things that have happened to me in the last 10 years.

But now I think we are getting into specifics of each individuals situation

You are absolutely right, it's up to each person to figure out their own plan. Good luck.

[oversteer]

Secondly, I take all the money out but I put the excess in savings, so it actually earns some interest. So I'm not just blowing it all! Some months I do, but others I don't.

This seems really odd considering you're paying 25% tax on it

I don't know your situation, but let's assume you're going to have a few years off at some point and have kids - you won't be working, so you can withdraw all this money essentially tax free - isn't that a better 'low risk investment' than anything you can get now ?

[Bexter]

OK, fair enough if you want to take your company profit and spend it or pay off your debts/mortgage then go for it!

But taking money out of the company and incurring higher rate tax just so you can put it in a savings account doesn't appear to be very good tax planning as you you lose 25% of the money for no benefit. Why not just leave the money you don't immediately need in a company savings account or get your company to invest it in the same manner as you would as a in individual. That way you defer paying the tax and if your circumstances change then you may be able to take the money tax free. That's a potential 25% return on investment.

Ok, I really genuinely am trying to understand this. You're saying leave it in the company on the basis that in future, my circumstances may change, i.e. I'm out of work for a year, and then I can take it tax free? If so, again I can see the point.
Like you say, for the first 6 months of contracting, I was taking it out to pay off all my university debts, which I have now done. So that made sense to do at the time. And I don't forsee me being out of work for the next 3-5 years, after which point I may end up going back to being permie. But now I think we are getting into specifics of each individuals situation and overall I think that's the answer to the question - it depends what you're doing with the money and what the plan is for the future.

[Wanderer]

I take all the money out but I put the excess in savings, so it actually earns some interest.

OK, fair enough if you want to take your company profit and spend it or pay off your debts/mortgage then go for it!

But taking money out of the company and incurring higher rate tax just so you can put it in a savings account doesn't appear to be very good tax planning as you you lose 25% of the money for no benefit. Why not just leave the money you don't immediately need in a company savings account or get your company to invest it in the same manner as you would as a in individual. That way you defer paying the tax and if your circumstances change then you may be able to take the money tax free. That's a potential 25% return on investment.

[Bexter]

When I went back to contracting - with a young family it was a calculated risk. It wasn't about earning and paying as much tax as possible. It was about only having to work 6 months of the year to earn the same amount.

Prozak, you make a good point that I had overlooked. If you want to only work 6 months a year, I can totally understand leaving money in the business as this makes good sense.

As for the NorthernLadUK, as usual, you jump to your own conclusions about other people's situation and generally drone on about being on the bench. I'm sorry, but that's not something I worry about. I'm a qualified accountant working as a BA in IB, I have tons of varied experience to fall back on in finance, risk and IT, and if necessary, I can get another job within a very short space of time. I understand it can be a serious issue for some people in certain industries, but not for everyone!
Even with that in mind, I still have back up plans. For a start, my other half works and can pay all mortgage/bills for both of us if necessary.
Secondly, I take all the money out but I put the excess in savings, so it actually earns some interest. So I'm not just blowing it all! Some months I do, but others I don't.

Now, if you are holding to form, I expect you'll now go off and find some basic/stupid accountancy question I asked around ltd companies some time ago (there are plenty to chose from), to ridicule me about being a QA and then come back to post it here and reduce any small amount of credibility I may have.

The only point I'm trying to make is that if you've earnt it, you can't get away from paying the tax (short of putting it all in apension of taking 6 months off), so what difference does it make when you take it out. What you did with it, after you take it out, is a different story.

[prozak]

and don't forget a permie has to wait 12months to get their money.

you can get your whole "allowance" as soon as you have enough profit.

[prozak]

I still struggle with this concept and the views of some on this. Whilst I agree with Wanderer above, that those are all viable options of what to do with the money, I don't see the point.

Part of the reason I moved into contracting is to earn more, so I can enjoy life more! Not to limit my income to £46,750 (or whatever it is!) per year, I could have stayed perm for that! What's the point of leaving all the money in the company, other than it being just a safety net. Short of putting it all in a pension, I don't see how you can ever get away with not paying the tax, so I just take it out and pay higher rate tax on the divs. That way it can at least earn interest in a personal savings account.

I do leave a small amount in the company for holiday, sick days, etc, but in general, you'll never not have to pay tax on it, whether you pay it as you go, or by taking out a whole lump sum in x years time, so whats the difference?

Personally I really don't get this viewpoint.

If you are a single shareholder paying yourself 7072 a year you can basically take home £39,256 a year. This is equivalent to a permie on 55k. Obviously this gets better when you have someone to split the dividends with... My wife and I take home the equivalent of an 85k (i think it was)

When I went back to contracting - with a young family it was a calculated risk. It wasn't about earning and paying as much tax as possible. It was about only having to work 6 months of the year to earn the same amount.

Working 12 months of the year is a bonus.

Every 12 month period I work is banking an early retirement or years in the future where I don't have to work.

[kingcook]

Them that make it plan for the worst, them that don't piss it all up the wall on handbags.

+1

I'm quite new to contracting (a couple of years experience), and after spending about 6 months pissing it up the wall, i realised that i needed to think differently!

[MiniMani]

Which is one of the biggest mistakes new (and experienced) contractors make. You are now a business, not a salaried permie with feet under the desk. You take temporary work when and where you can find it and the world is turning to rat tulip around our ears. The fast way out of contracting and back in to permie land is to spend all your money, get a long stint on the bench and be forced back. It happens even to some of our more experienced guys n gals.

Do a search for the word Bench and read the horror stories here.

You are now a business in a very difficult market. Them that make it plan for the worst, them that don't piss it all up the wall on handbags.

.....And don't be looking for quick outs all the time like directors loan. If you have the wrong attitude from the outset you will get in trouble. As you are a director and have are legally responsible for your accountants so there is more at stake that not having enough for the next handbag. Get on the wrong side of some of the departments at HMRC and you are looking at jail time.

Sheeeeesh! The handbag thing was a joke (sort of!). Now that I've read the replies I understand it a bit more and will not be splurging!!!

Thanks all for your advice

[northernladuk]

Thankyou for your viewpoints so far... interesting. Wanderer I really appreciate the detailed reply and not being ridiculed for asking a silly question!

On the other hand, what Bexter said - I was eagerly awaiting a much higher salary and leaving it all in the company account pains me, especially as I was going to treat myself to some new handbags so i'm torn...! Although if I understand correctly I can take a director loan for up to £5k (although not sure on the frequency of this off hand?)

Which is one of the biggest mistakes new (and experienced) contractors make. You are now a business, not a salaried permie with feet under the desk. You take temporary work when and where you can find it and the world is turning to rat tulip around our ears. The fast way out of contracting and back in to permie land is to spend all your money, get a long stint on the bench and be forced back. It happens even to some of our more experienced guys n gals.

Do a search for the word Bench and read the horror stories here.

You are now a business in a very difficult market. Them that make it plan for the worst, them that don't piss it all up the wall on handbags.

.....And don't be looking for quick outs all the time like directors loan. If you have the wrong attitude from the outset you will get in trouble. As you are a director and have are legally responsible for your accountants so there is more at stake that not having enough for the next handbag. Get on the wrong side of some of the departments at HMRC and you are looking at jail time.

[Bugbait]

I pay dividends up to the higher tax limit (£46k or thereabouts) each year and occasionally go over when required, ie. This year since I’m renovating the house. I move a couple grand into a pension each month as well since the long term tax savings are significant.