Dividend Income – How much?

[ASB]

Can you actually just keep the money in the business if you don't need it?

Yes. But there will be a point at which there is a risk of becoming a Close investment company. This means you pay CT at full rate not smaller companies rate. Opinion is divided on when this might happen. However if you are not actively trading then assets held by the company are not really for the purposes of trade and this could trigger this - of course you need chargeable profits for this to be an issue.

If you are trading it can still be a problem, but in practice I don't think anybody has really seen much in the way of challenge. If any assets held by the company exceeded the gross profits from trading I think it might be a risk.

Can you just build up the reserves and liquidate in one go?

Yes, but if you are totally loaded don't forget the lifetime limit on entrepreneurs releif. This might affect any tax paid on exit. However in this case leave the country, go to somewhere that doesn't tax capital gains and come back in 5 years so you don't have to repay the CGT you didn't pay.

Is there any possibility of somehow being challenged about taking no salary at all?

Yes, if you are an employee. NMW is now enforced by HMRC so they could attack this. But of course just ensure you don't have a service contract then currently NMW doesn't apply so HMRC can go forth.

Can you invest the money in the Company in shares?

You can invest it what you want. The tax treatment is in accordance with the laws so a few ks of marching powder would be a bit rash.

Shares, Gilts, Property the usual gamut. If it's legal as an individual it is usually available to the company. However the companys CGT regime is different. Basically there is no CGT allowance.

[BlasterBates]

Can you actually just keep the money in the business if you don't need it?

Can you just build up the reserves and liquidate in one go?

Is there any possibility of somehow being challenged about taking no salary at all?

Can you invest the money in the Company in shares?

[Clare@InTouch]

So in the future, we likley wont bother to wind up our companies, we'll just drip feed the divs out over a period of time and once there is no activity on the bank accounts, have the company set to "dormant", cancel our accountants, and they will just sit there for all eternity gathering dust... strang thought!

Yes - or pay the tax hit, or pay for a formal winding up. Money up to £25k can be paid out as capital so how much tax you pay depends on your reserves. Say you have £100,000, then quick thinking out loud gives:

Dividend within basic rate band - £25,000 @ 0%
Dividend in higher rates - £50,000 @ 25% = £12,500
Capital Gain £25,000 @ 10% = £2,500 (assuming ER is available)

So that's £15,000 tax, which equates to 15%. Still not bad. Plus the gain would be reduced further by your annual CGT exemption of £10k.

You just need to get the timing right with regard to paying the dividends at the right time to ensure they fall into a clean tax year (so you have no other income eating up your basic rate band) and they take reserves down below the magic £25k.

You could get that tax down to £7,500 (10% of £75K) with a formal winding up, but then you're paying professional fees too so the overall profit isn't really that much if it results in fees of £5,000 on top of the tax due.

It's going to be one of those things were professional advice will be vital before making any moves so that you can plan the timing and best way to close.

[Joeman]

Up until 01/03/2012 we've been able to utilise something called ESC C16, which is a concession from HMRC that basically says you're allowed to take the final money as Capital even though you've not done a full winding up (subject to certain assurances being given). ESCs are becoming law, and that's given HMRC the chance to amend them. The good news is that you no longer need HMRC approval, the bad is that the Capital Distribution is limited to £25,000. Anything over that and you need an official winding up which will cost a few thousand. You're going to need reserves of £50k or more to make it cost effective at the moment.

Hopefully lower cost winding up packages will appear in due course, but it has to be done by a qualified practitioner so it's never going to be cheap.

You can always leave the money in the company until you stop working, then drip feed the dividends out over a few years. As long as they are basic rate, so you have no other income using up your basic rate tax band, then there's no tax at all. Useful if you're near retirement of thinking VERY long term.

Consider pensions too, very tax efficient. Your company can pay up to £50k a year into your personal pension.

So in the future, we likley wont bother to wind up our companies, we'll just drip feed the divs out over a period of time and once there is no activity on the bank accounts, have the company set to "dormant", cancel our accountants, and they will just sit there for all eternity gathering dust... strang thought!

[Nixon Williams]

Clare, thanks for your suggestion. Can you advise why the official winding of the company will cost c£5000 in future and when is it applicable from?

You should be able to get this done for much less than this, I think I saw one of the accountants on here stating a figure of half of that, we are certainly looking at linking up with a firm that will charge about £3500.

Alan

[northernladuk]

There are a set of newbie guides to the right hand side which will cover this and many of the other basic questions people have when starting contracting.

[Clare@InTouch]

Clare, thanks for your suggestion. Can you advise why the official winding of the company will cost c£5000 in future and when is it applicable from?


@kingcook –I have just started my company and have no plans to wind it up soon. I will be even more interested now to understand more on the c£5000 costs from Clare that is going to be applicable sometime in future.

Up until 01/03/2012 we've been able to utilise something called ESC C16, which is a concession from HMRC that basically says you're allowed to take the final money as Capital even though you've not done a full winding up (subject to certain assurances being given). ESCs are becoming law, and that's given HMRC the chance to amend them. The good news is that you no longer need HMRC approval, the bad is that the Capital Distribution is limited to £25,000. Anything over that and you need an official winding up which will cost a few thousand. You're going to need reserves of £50k or more to make it cost effective at the moment.

Hopefully lower cost winding up packages will appear in due course, but it has to be done by a qualified practitioner so it's never going to be cheap.

You can always leave the money in the company until you stop working, then drip feed the dividends out over a few years. As long as they are basic rate, so you have no other income using up your basic rate tax band, then there's no tax at all. Useful if you're near retirement of thinking VERY long term.

Consider pensions too, very tax efficient. Your company can pay up to £50k a year into your personal pension.

[coolguycp1]

Clare, thanks for your suggestion. Can you advise why the official winding of the company will cost c£5000 in future and when is it applicable from?


@kingcook –I have just started my company and have no plans to wind it up soon. I will be even more interested now to understand more on the c£5000 costs from Clare that is going to be applicable sometime in future.

[kingcook]

I am new to contracting and having recently moved from permie to a contract position. My accountant has told me that I have the option of taking either the full dividend from the company at the end of each month or I can take out a lower dividend keeping the rest in the company accounts.

However, he also suggested that the latter option is better as when I will close the company, the available reserves in the company account will be subject to a lower tax than if I were to take the full amount available every month and pay a higher dividend tax on the income at the end of each FY.

When are you planning on closing the company that you have just started up?

[Clare@InTouch]

Each year you get tax bands, and income up to £42,475 is considered basic rate. Dividends within the basic rate tax band are effectively tax free. Dividends in higher rates are taxed at 25%. So, you can chose to empty the company account each month, but if you do then you may suffer some higher rate tax at 25%. The amount you pay will depend on your overall income - salary, bank interest, rental income etc - as they all eat into your basic rate band allowance.

If you leave the money in the company there are no tax implications, and when you cease to trade you can close down and take the final distribution as capital. Capital gains can benefit from Entrepreneur's Relief, taking the tax rate down to 10%. This is obviously better than the 25% higher dividend rate.

The Capital route will shortly only be available if you have an official winding up though, and that will cost c£5,000. You therefore need to balance out the tax you'll save against the professional fees you'll pay.

[coolguycp1]

I am new to contracting and having recently moved from permie to a contract position. My accountant has told me that I have the option of taking either the full dividend from the company at the end of each month or I can take out a lower dividend keeping the rest in the company accounts.

However, he also suggested that the latter option is better as when I will close the company, the available reserves in the company account will be subject to a lower tax than if I were to take the full amount available every month and pay a higher dividend tax on the income at the end of each FY.

I am not sure exactly how the accountant made the assumptions and if anyone on this forum can help make me decide which is the better option, that will be much appreciated.