Contractors' Questions: How to maximise income before winding up?
Contractor’s Question: I plan to wind up my four-year-old PSC and a Members Voluntary Liquidation (MVL) looks best, as I am solvent with cash reserves excess of £25,000. But how best to maximise my salary/dividends before my October year-end?
In 2016/17, I paid myself a monthly salary of £671 so can I, for the next quarter, take three equal monthly salary payments up to the NI threshold? So, £2,720 salary payments in July, August and September (total £8,160), hopefully without raising a red flag to HMRC?
Or would a better tax strategy be to keep the monthly £671 payments, then make the rest up with dividends to £45,000 to take advantage of the 7.5% tax liability before end of October, then look to liquidate using Entrepreneurs’ Relief (10%) on the remaining cash reserves?
Expert’s Answer: You are correct, in that the best process for you as a business owner to follow would be to action a MVL process as you are both solvent and have distributable reserves of over £25,000. This is typically a preferred route for tax relief among business owners. But you must first make some considerations relating to your other pointers.
It should be noted that the UK’s tax rates are based on complete income -- both PAYE and dividend, so you need to look at the entire income amount when looking at your tax band. The 7.5% would only apply to the extent that has been indicated in the event that you have no other taxable income.
As regards your query about the National Insurance threshold; these ceilings are set on an annual basis. Therefore, there should be no difficulty in you taking the three equal monthly salary payments up to the NI threshold in Q3, as you suggest.
A strategy to consider, would be to wind up the company through an MVL immediately rather than waiting a few months. The company’s reserves and capital can be repaid to the shareholders as capital distributions for Capital Gains Tax purposes. You will (generally-speaking) then qualify for the Entrepreneur Relief rate of 10%, which is likely to be a better overall exit strategy.
We hope this provides some useful guidance. However, for a full breakdown and detailed advice, we would need to know the complete income picture to confirm this and ensure everything is managed correctly, as none of us want to raise a red flag to HMRC!
The expert’s answer is by Steve Parker, partner, and Gareth Wilcox, manager, of Opus Business Services.