Drawing dividends over higher tax threshold - should I?

[Bug]

This is my first post - and I've a lot to learn - so please excuse me if the answer is obvious!

I began as a contractor about 12 months ago, have a reasonable daily rate and have just posted Y1 net profits well in excess of the higher tax threshold. So far so lucky. Now, my accountant is telling me that, rather than drawing all net profit as dividends, I should leave everything that would attract higher rate tax in the business. My instinct is to draw a larger dividend - in order to pay off a lump of mortgage - and just accept that I will pay the additional income tax because, well, if it's in the business account it's no good to me, and I'll have to draw it out at some point, right?? I understand the logic of his argument if you think you may earn less than the higher tax threshold - so you can 'top up' with profit from earlier years, but I'm - hopefully - going to keep earning well above that for the foreseeable future.

What do other contractors do? Should I leave it in the business? Should I draw a larger dividend and pay the additional income tax? If I leave it in the business, at what point do I draw it out?

Thank you.

Bug

[NotAllThere]

You should build up a good some in your company, because you never know when you'll find work hard to come by. Otherwise, if you've a good use for the money - which some might say paying off the mortgage is - then do that and take the hit.

[ASB]

You should build up a good some in your company, because you never know when you'll find work hard to come by. Otherwise, if you've a good use for the money - which some might say paying off the mortgage is - then do that and take the hit.

True, there is also a case to leave it and take a capital distribution using entrepreneurs relief. This would be cheaper oveall, but depends very much on how confident one is of this route remaining open.

There are signs it might not be. Share buyback is another potential way, in essense the objective being to covert the excess to capital gain in order to use the additional allowances.

The op should perhaps discuss options with their accountant.

[Clare@InTouch]

True, there is also a case to leave it and take a capital distribution using entrepreneurs relief. This would be cheaper oveall, but depends very much on how confident one is of this route remaining open.

There are signs it might not be. Share buyback is another potential way, in essense the objective being to covert the excess to capital gain in order to use the additional allowances.

The op should perhaps discuss options with their accountant.

The Capital Distribution route is changing from 01/03 and whilst you'll still be able to do it, you'll have to pay an official liquidator for a winding up, which will cost c£7k. That's for any distribution of £25,000 or more. Anything under £25,000 can just be taken as a CD without official agreement from HMRC.

[MrRobin]

The Capital Distribution route is changing from 01/03 and whilst you'll still be able to do it, you'll have to pay an official liquidator for a winding up, which will cost c£7k. That's for any distribution of £25,000 or more. Anything under £25,000 can just be taken as a CD without official agreement from HMRC.

Why will it cost c£7k for a liquidator? Is that a minimum amount specified by a governing body? Presumably liquidating a relatively simple company such as a 1 man Ltd with minimal physical assets should be a straight forward activity?

[Clare@InTouch]

Why will it cost c£7k for a liquidator? Is that a minimum amount specified by a governing body? Presumably liquidating a relatively simple company such as a 1 man Ltd with minimal physical assets should be a straight forward activity?

It's the figure that's being bandied about in the press about this subject. I would presume that with a huge gap in the market opening up for dealing with a simple "one man limited company" winding up like this we'll see cheaper options appear in time.

[MrRobin]

I would presume that with a huge gap in the market opening up for dealing with a simple "one man limited company" winding up like this we'll see cheaper options appear in time.

Yes those were my thoughts, and if not then perhaps a plan B idea!

[Nixon Williams]

Why will it cost c£7k for a liquidator? Is that a minimum amount specified by a governing body? Presumably liquidating a relatively simple company such as a 1 man Ltd with minimal physical assets should be a straight forward activity?

You should be able to get this done for much lower than this, we are in the process of setting up a fixed cost for our clients of £3500+VAT

Most contractor companies should be easier to process than other companies.

Alan

[psychocandy]

This is my first post - and I've a lot to learn - so please excuse me if the answer is obvious!

I began as a contractor about 12 months ago, have a reasonable daily rate and have just posted Y1 net profits well in excess of the higher tax threshold. So far so lucky. Now, my accountant is telling me that, rather than drawing all net profit as dividends, I should leave everything that would attract higher rate tax in the business. My instinct is to draw a larger dividend - in order to pay off a lump of mortgage - and just accept that I will pay the additional income tax because, well, if it's in the business account it's no good to me, and I'll have to draw it out at some point, right?? I understand the logic of his argument if you think you may earn less than the higher tax threshold - so you can 'top up' with profit from earlier years, but I'm - hopefully - going to keep earning well above that for the foreseeable future.

What do other contractors do? Should I leave it in the business? Should I draw a larger dividend and pay the additional income tax? If I leave it in the business, at what point do I draw it out?

Thank you.

Bug

Leave it there for now. Why pay 40% tax on it unless you really need it?

Or if you dont need the money bung it in a SIPP or something?

Personally, if it was me, I'd leave it in the company. Spending it all and assuming contract income is going to be continuous is not the best idea IMHO.

[northernladuk]

Leave it there for now. Why pay 40% tax on it unless you really need it?

Or if you dont need the money bung it in a SIPP or something?

Personally, if it was me, I'd leave it in the company. Spending it all and assuming contract income is going to be continuous is not the best idea IMHO.

40% ???