Pensions and Ltd Companies

[Deleted User]

I have a question based on trying to pay off my mortgage (yes have posted it there too but this covers pensions and limited companies as well). Would appreciate help from anyone who can advise.


I have 3 years to pay off my mortgage and need £400,000. I am looking for the quickest way to do this. I am employed via my own limited company and am the only director. It seems there may be a number of ways to pay this off -

1) take dividends and pay mortgage of £400,000 from personal income (downside need to pay the personal income tax upfront)

2) take a business loan from my ltd company (not entirely sure how this works but can the money be taken and the tax and refund be paid later?)

3) put the money directly from my company into my personal pension and take it from there to pay mortgage
( as I have £70,000 in pension already would that be £330,000 minus 25% which is around £260,000 - that means the £400,000 would be there quickest as I only have to earn £260,000 rather than £400,000 )? Can I then take the pension, pay off the mortgage and spend the next year or two earning to save cash and replensish savings (once mortgage is out of way, almost all money can go to do this).


And yes, I am over 55 and have another source of pension income from buy to let properties.


Thank you.

dunstonh

1) take dividends and pay mortgage of £400,000 from personal income (downside need to pay the personal income tax upfront)

Dividends of how much? Remember that the dividend tax really hits higher rate/highest rate taxpayers now. Plus, there is the potential for personal allowance reduction.

2) take a business loan from my ltd company (not entirely sure how this works but can the money be taken and the tax and refund be paid later?)

Tax is an issue unless it is a small amount and repaid relatively quickly.

3) put the money directly from my company into my personal pension and take it from there to pay mortgage

Tax again. Plus, reduction in annual allowance from £40,000 to £10,000.

Why are you so desperate to repay the mortgage. Diverting funds from S&S ISAs and pensions to mortgage is usually a bad idea.

[Deleted User]

The mortgage is on a deadline, can't be extended and I have poor credit so would not get - nor want - another one. I know there is tax to pay which ever route but what I am looking for is the figures and timing - how much needs to be paid and when. No other income. Thanks.

xylophone

Had you thought of taking advice specifically tailored to your circumstances from an appropriately qualified professional?

https://www.unbiased.co.uk/

[Deleted User]

Yes and am doing that. Just thought I would come on here to see if anyone can help me work out figures so I can go to that meeting prepared

dunstonh

Basically, you would be looking at upto 60% effective tax on 75% of the pension (through loss of personal allowance and movement into highest rate band).

So, for £100k on the 75% worth of pension, you would actually get around £40k after tax.

[Deleted User]

Thank you - helpful - but what is the timing on this? Is the tax retained so I actually receive £40k or do I receive the £100k and have to repay £60k or so later?

dunstonh

Firstly, you only have a £40k annual allowance to pay into the pension. Once you take the 75% element (the other 25% being tax free), your annual allowance is reduced to £10k a year.

You will be taxed at emergency tax as the lump is paid. Then extra tax will be payable once your year end is calculated.

So, you will probably receive around £50k with a £10k tax bill later.

I dont believe pension is going to be a viable option due to the annual allowance. You are going to have to take the bulk of hit in dividend tax (so after paying your 20% in corporate tax on your profit), you will have 32.5% tax on the amount that is in the higher rate band and 38.1% in the highest rate band. You would also lose your personal allowance That bill comes in the year after you do the transaction.

You probably need to speak to your accountant to see if there is any other alternative they can think of.

MoneySavingUser

pg7 wrote: »

1) take dividends and pay mortgage of £400,000 from personal income (downside need to pay the personal income tax upfront)

2) take a business loan from my ltd company (not entirely sure how this works but can the money be taken and the tax and refund be paid later?)

3) put the money directly from my company into my personal pension and take it from there to pay mortgage
( as I have £70,000 in pension already would that be £330,000 minus 25% which is around £260,000 - that means the £400,000 would be there quickest as I only have to earn £260,000 rather than £400,000 )? Can I then take the pension, pay off the mortgage and spend the next year or two earning to save cash and replensish savings (once mortgage is out of way, almost all money can go to do this).

Option 1 - The maximum tax to pay is 38.1% tax on the dividends so if it is all taxed at that rate you would need to withdraw £646,203 in dividends. If you still have some basic rate/higher rate available then it would be lower and you could spread it over multiple years possibly.

Option 2 - taking out a loan of £400,000. Assuming you have no Director's loan balance at the moment then the company will need to pay s455 tax of 32.5% of the loan being £130,000 if the loan is not repaid to the company within 9m of the year end.

The s455 tax will be refunded to the company 9m after the year end in which the loan is repaid (and refunded partially if it is partially repaid).

Also loans of more than £10,000 are a benefit in kind. You will have to pay income tax on the loan (unless the company charges you interest at least equal to the official HMRC interest rate - 3%). The company would also need to pay 13.8% Class 1A national insurance on the loan. Unlike the s455 tax these are not refunded when you repay the loan.

dunstonh has covered option 3 quite well - as he says the main issues are:

- The £40k annual allowance
- Tax charges if you exceed the allowance
- The £10k MPAA if you take more than the tax-free cash
- Emergency tax on a UPFLS payment
- Tax charges on the remaining 75% of the pension

Do you currently receive a salary/dividends from the company? Do you have a director's loan account balance (maybe from incorporation of a sole trader business)?

[Deleted User]

Brilliant. Thank you. That is what I was hoping for. No directors loan so far. Currently get a salary / dividends but could hold back on that. Many many thanks.