How to make the most of unclaimed dividends?

Contractor's Question I am a one-man limited company, paying myself a salary and taking a dividend from time to time. I take the amount of dividends in order to remain under the higher dividend tax threshold. This means there is cash still left in the business, but if I took this money I would be liable for a higher rate of tax. So how do I make the most of it without taking it as a dividend? Of course, I can only put so much into a pension, so I suppose I need to consider other investments.

Expert's Answer The highest marginal rate of tax (including NIC) for individuals extracting money from a corporate vehicle is 61.5%, so there really isn't much incentive to take cash from a company unless it is needed.

Using the company as a corporate wrapper to hold investments is an attractive option, particularly when corporation tax is only 21% for a small company, reducing to 20% from 1 April 2011. If holding investments in a corporate vehicle is attractive, you will need to consider non-tax issues. If the same corporate vehicle is used to hold investments and trade, you must ask whether:

- you are putting your wealth at risk from a bad business decision or a stroke of misfortune?
- the investment portfolio will affect your ability to claim Entrepreneur's Relief on a future liquidation or sale of the company?

A separate corporate vehicle may be the solution, although note that, in most cases, investment companies owned by five or fewer shareholders will pay tax at 28% on their investment income (which is likely to reduce by 1% a year over the next four financial years to 24%).

In terms of which investment to make, this is a matter of personal choice, which you can discuss with your independent financial adviser. Pensions benefit from tax relief, but do not forget the loss of flexibility over the capital.

The expert was Paul Spindler, technology partner at Kingston Smith LLP, the chartered accountants.

Sunday 25th Jul 2010