director of small ltd company - pensions? Or property?

mubeye

I run a small ltd company, with has net profits of about 100k a year. i am the director and take out the minimum salary of 10kish and about 50k in divis.

The business account as about 100k profits surplus to requirements [edit: which will be subject to corp tax if don't spend it within a few months]

My original plan was to leave the cash in the company account until the business runs out of steam in a couple of yers, then withdraw the cash under threshold. However, it's looking like the business might perform for longer than originally anticipated.

I have never had a pension before I've only just started to think about this kind of thing.

I'm in my mid 30s, have about 250k personal savings, more or less liquid, no property but will likely buy something modest this autumn. Otherwise I have no financial commitments or expensive plans.

Would you bung it all in a pension if you were me? Is this even possible? Is it a good idea tax wise? Are there other options, eg could I buy (commerical?) property with the profits somehow?

Thanks in advance

HappyMJ

Do you own any property already? i.e the house you live in? If you're renting then I'd consider buying a property to live in otherwise property investment is like buying a job. It's not a passive investment, it's a business, you need to work at it and if you're making a £100k profit you would outsource that task to someone else which will reduce the return and make the investment into the property business not worth it.

You would get better returns elsewhere but yes the company can buy a property and be taxed at company rates.

I'd spend some of it and save some of it for later.

mubeye

HappyMJ wrote: »

Do you own any property already? i.e the house you live in? If you're renting then I'd consider buying a property to live in otherwise property investment is like buying a job. It's not a passive investment, it's a business, you need to work at it and if you're making a £100k profit you would outsource that task to someone else which will reduce the return and make the investment into the property business not worth it.

You would get better returns elsewhere but yes the company can buy a property and be taxed at company rates.

I'd spend some of it and save some of it for later.

Sorry my mistake, the business cash is not 'post tax'. I still have a few months to spend it on pensions or something else before it is taxed. I've edited the OP

uk1

Ensure you have a very good accountant and explore how you might accumulate cash over the years and take it out when you close the business Our one was an ex-tax inspector.

There use to be a seam of gold whereby you could avoid some tax penalties if you could show that you hadn't accumulated cash for the specific purpose of taking it out when you closed the limited company but were building reserves for some viable purpose. We built a paper trail to show this and was able to avoid a considerable tax bill when we changed from a limited company to a partnership.

Jeff

dunstonh

Would you bung it all in a pension if you were me? Is this even possible? Is it a good idea tax wise? Are there other options, eg could I buy (commerical?) property with the profits somehow?

From a tax point of view, property would be expensive. Income tax on the rental income at higher rate. The govt reducing (and probably removing at some point) the ability to set off interest payments against rental income. Capital gains tax on disposal. Whereas a pension is a no brainer for a company director as you get money out of your company tax free with no NI to pay and it reduces your corporation tax bill.

bibirella

We did invest in a property years ago where we are still living! As we are living there for over 30 years now we save a lot of money! We even did rent a part of the house we are living in! So we could save some money! It always depends on how long you want to live somewhere! But also - you always can sell and have a better credit than at the beginning! When you are self-employed it makes no sense to pay money for rent, you always should invest!
We still have to work about 3 more years and as we have no children we are already thinking about selling our house and property and then buy an apartment like on sabbiabeachcondos.com/. We lived in Ohio long enough so that we want something new! For sure we could still be landlords and earn money with it! This is a lot of work though and for buying this new place and having enough money for our retirement selling is the best option for us!
Make some calculations and listen to your feelings (but more focus on the calculations )
Take care!!

ex-pat_scot

Extracting surplus funds out of a limited company is quite restricted.


Taking it as salary is not tax-efficient, as you will suffer ers and ees NIC.
Taking it as divi is not as efficient as it used to be - particularly if you would be subject to higher rate band.
You could pay into a SIPP up to the max £40,000 pa (plus carry back from last 3 years' contributions).
You can do a "Members Voluntary Liquidation" if the underlying business ceases. If I recall, the assets get a 10% tax charge. (you would need a bona fide reason for stopping the business -for example going into employment or another field of business).


if you leave the funds in the company, then you can put them to work with certain restrictions.
- you could put them on deposit and earn some interest (which would be taxable profit)
- you could invest them - but at the risk that the company might be deemed an investment company in the future, and subject to more onerous tax regime
- you could buy property, although even with £100,000 you would probably be looking at having to raise a commercial loan for the balance of the purchase.
- your SIPP could also be used to purchase commercial property.
-remember that you will need an amount of working capital remaining in the business. I'd certainly be cautious about having a high risk illiquid investment in commercial property, if I were to require funds at any point.

atush

I would set up and have the company pay into a pension for you.

Judwin

I'd get the company to make a £40K lump sum contribution into a SIPP. This is tax deductible for corporation tax purposes, so will effectively only cost the company £32K (assuming 20% corporation tax). If you don't pay £40K into the pension, then company is going to have to pay 20% CT on the money anyway.


I don't think you can use the carry forward of previous years allowances unless you were already a member of a pension scheme. Shame really, otherwise you could potentially of dumped up to £160K into a pension plan (£40K for this year and up to the 3 previous years), thus avoiding up to £32K of CT liability.


Do you have a wife/partner/other-half as a director? If you do then you may also be able to pay up to £40K into a pension plan for him/her. That's accounts for £80K of your £100K.


Watch out for the dividends. The rules have changed this year. You get a £5K allowance, and dividends over that amount will be taxed at 7.5% in the basic rate band, and 32.5% in the HRT band. Better than taking the money as salary/income, but not nearly as good as under the old notional tax credit rules.