Contractors' Questions: How to get cash out of my Limited Company?
Contractor's Question: What is the most tax-efficient way to make the most out of cash left in a limited company? I pay myself a salary and then take dividends from time to time. However the amount of dividend I take is set in order to remain under the higher dividend tax threshold. This obviously means there is cash still left in the business, but if I took this out, I would be liable for a higher rate of tax.
How can I make the most of this money without taking it as a dividend? I could put some of it into my pension pot, or is there another route?
Expert's Answer: The solution you want depends on whether you need the money personally or whether you can retain it in the company for the company to invest. It seems pointless to pay tax for the sake of it, especially when income generated on investments owned by a company will be taxed at a maximum of 29.75%, whereas income earned personally will be taxed at up to 60%.
Retaining large sums of money in a company which carries on a trade can be dangerous, for instance, if there is a claim against the company, as your investments would be at risk. If properly structured as a group, it may be possible to ring fence the risk at a relatively low cost. If you have built up large investment sums there is the danger that HM Revenue & Customs will consider it an investment company rather than a trading company, which means you will be unable to claim Entrepreneur's Relief on the shares you own within the company.
Corporate tax relief may be available where a company invests in other unconnected trading businesses under the corporate venturing scheme.
If you need the money personally, then you need to consider your options carefully. With a top rate of income tax at 50% and capital gains tax (CGT) at 18%, there is significant interest in re-characterising income into capital for tax purposes.
However, with the proposal to introduce higher rates of CGT written into the new government's coalition agreement, there will be pressure on you to act sooner rather than later. Shareholdings over 5% in a trading company currently attract Entrepreneur's Relief and this is expected to continue or even be enhanced.
You must be aware that there is anti-avoidance legislation to prevent certain transactions from being charged to CGT, for instance, if you were to sell back some of your shares to the company, the gain would be treated for tax purposes in the same way as a dividend. Similarly, if you were to liquidate the company and recommence the same trade in another vehicle, the gain could be caught by the same legislation.
You mention making pension contributions. However the new rules on tax relief for pension contributions mean only a limited amount of tax relief is available. The rules are complex and you will need advice from your tax adviser or an independent financial adviser to establish the amount of tax relief that would be available.
The expert was Paul Spindler, a technology partner at Kingston Smith LLP, the chartered accountants.