Contractors' Questions: How to pay a final dividend, tax-efficiently?

Contractor’s Question: A personal services company I set up in 2011 has provided me with a healthy salary and dividends, but I’m now thinking of winding it up as I’ve received an offer of permanent employment from a well-respected IT giant. But my PSC still has about £20,000 in its bank account, so what would be the most tax-efficient way of paying a final salary or dividend and then closing it down?

Expert’s Answer: The most cost-effective way of closing a solvent company is to fill in an application for Companies House to strike it off the register. Alternatively, you could enter into a members’ voluntary liquidation but this would prove more costly. Nonetheless, you should consider this route if your PSC has significant capital to distribute, or you are concerned about creditors emerging at a later date.

Fortunately for you, as long as the company has less than £25,000 to distribute, you are able to decide whether you wish to treat the distribution as a capital receipt or an income dividend.

Also in terms of tax-efficiency, it may be best to take out the cash in a form that would be subject to capital gains tax, in which case you wouldn’t have to pay income tax. Currently, the first £10,900 of capital gains is exempt from tax and the remainder would be taxed at 28% or, if you qualify for Entrepreneurs’ Relief, 10%. Also in the current tax year, dividend income can attract income tax up to an effective rate of 30.6%, depending on your other income.

However before proceeding, you must make sure the company has settled all amounts owed and collected all its debts. Remember to factor-in any costs you may incur in shutting the company. Then, and critically from the taxman’s perspective, ensure you calculate and pay any remaining taxes due, including corporation tax.

Having made a distribution, you have to ensure the company is dissolved within two years -- otherwise the cash you receive will be taxed as income.

The expert was Jon Dawson, partner at Top 20 chartered accountancy firm Kingston Smith LLP.

Wednesday 19th Mar 2014