Taper relief vs Dividends

**SallyAnne** · 12 December 2006, 17:03

Originally posted by turbo

Usual route when making use of taper relief is to pay a minimum salary and the rest in dividends upto the 38.3k threshold, then take the rest as taper relief.

Just wondered whether it would be more tax efficient to take a lower amount in dividends and leave a greater amount in the company, which could be taken as taper relief.

An extreme example: take a min salary of 5k, no dividends. Build up the rest and take it all as taper relief after a couple of years. - Assuming you could live on that wage for the time being.

turbo

Whats taper relief? I've never heard of it.

**chicane** · 12 December 2006, 17:06

I'm also somewhat intruiged by that - I've got enough savings to leave the money in my business account alone for a fair while if the returns are worth it...

**turbo** · 12 December 2006, 17:12

Originally posted by SallyAnne

Whats taper relief? I've never heard of it.

Seriously?

Seems to have been mentioned on these boards a fair bit...

Check out the 83% tax planning method outlined on the SJD site, that makes use of taper relief.

turbo

**minstrel** · 12 December 2006, 21:57

Originally posted by turbo

Just wondered whether it would be more tax efficient to take a lower amount in dividends and leave a greater amount in the company, which could be taken as taper relief.

As I understand it you would be no better off and probably marginally worse off if you were to take a lower amount in dividends.

You pay 19% corporation tax on company profits regardless of whether you go the dividends route or the capital distribution/taper relief route.

Providing you keep below the Higher Rate Threshold you'll have no further tax liability (beyond the 19% CT) on any dividends you receive. However, if you go the capital distribution/taper relief route you will have additional tax liability on the capital gain.

For example, lets assume you have profits of £100k each year for 3 years and HRT is £38k. We'll ignore min salary because it will have a similar effect in each scenario.

Dividend Route:

Total profit (TP) = 3 x £100k = £300k
Corporation tax (CT) = £300k @ 19% = £57k
Dividends (D) = 3 x (£38k x 0.9) = £102.6k

Funds available for capital distribution (CD) = TP - CT - D = £140.4k

75% Taper Relief means tax is due on (£140.4k @ 25%) - £8.5k (CGT Exemption) = £26.6k

Capital Gains Tax due (CGT) = £26.6k @ 40% = £10.64k

In your back pocket using the dividend route over 3 years is roughly D + CD - CGT = £102.6k + £140.4k - £10.64k = £232k

100% Capital Distribution Route:

Total profit (TP) = 3 x £100k = £300k
Corporation tax (CT) = £300k @ 19% = £57k
Dividends (D) = 0

Funds available for capital distribution (CD) = TP - CT - D = £243k

75% Taper Relief means tax is due on (£243k x 25%) - £8.5k (CGT Exemption) = £52.25k

Capital Gains Tax due (CGT) = £38k @ 22% + £14.25k @ 40% = £8.36k + £5.7k = £14.06k

In your back pocket using the 100% Capital Distribution Route over 3 years is roughly D + CD - CGT = £0k + £243k - £14.06k = £229k

It's only £3k difference so no big deal, but I definitely can't see any merit in not taking full dividends up to the 40% threshold each year.

**MarillionFan** · 12 December 2006, 22:14

I was going to say the same as minstrel. But no point now is there.

**VectraMan** · 12 December 2006, 22:26

I think you'd be no better off and probably marginally worse off.... doh!

Is there any reason why you can't keep pay the dividends over a number of years staying under the 40% bracket? So based on 300K profit (-19% corporation tax), you'd pay your dividends over 7 years.

**minstrel** · 12 December 2006, 22:44

Originally posted by MarillionFan

I was going to say the same as minstrel. But no point now is there.

Sorry

**minstrel** · 12 December 2006, 22:49

Originally posted by VectraMan

Is there any reason why you can't keep pay the dividends over a number of years staying under the 40% bracket? So based on 300K profit (-19% corporation tax), you'd pay your dividends over 7 years.

No reason why you can't pay the dividends over 7 years, but what are you going to do with the additional £400k profit you make in years 4 to 7?

Something you could do though if you want to take 4 years off or can afford to retire.

**turbo** · 13 December 2006, 08:59

Thanks for the example minstrel!

Just wonder if this has any other indirect advantages, e.g. the low salary, high dividend route is sometimes frowned upon - perhaps this could be a way to avoid that? But I guess as long as you can show you're outside of IR35, there's no reason to do that.

turbo

Taper relief vs Dividends