Small company - how much to take out as dividend and pension

room_101

Hi,

I've got a small limited company (contractor) of which I'm the sole employee and I would like to take £20k out of the company. I'm happy to put it to either a pension or dividends.
I've got £5k allowance on the dividends and then it increases to 7.5%.

I can also add money into my new pension portfolio at a charge of 1.8% for lump sum investments. I'll save here in corporation tax. There is currently no money in the portfolio. When the fund reaches £30k the charges on this pension decrease from 0.9% to 0.5%.

What is the best way to take this money out? I'm assuming that at least £5k goes out in dividends. What do I do with the remaining £15k? I'll not really be needing the money out as savings at this stage. I just what to maximise the tax efficieny in getting the money out.


Thanks.

room_101

Hi - can anyone give me some advice?

Thanks.

Sean473

room_101 wrote: »

Hi - can anyone give me some advice?

Thanks.

Hi,

I'm no expert on this but I would approach it in the following manner:

5k on dividends: That is your tax free allowance for 2017-2018
15k into Pension: In effect, when you put 15k into the pension, tax relief means you get 18.75k into it (3.75k from government)

If you don't need the 5k dividends, actually putting that 5K in the pension will mean the government paying you 5k making your total pension contribution 25K..

jimjames

room_101 wrote: »

Hi - can anyone give me some advice?

Thanks.

I'd suggest that your accountant would be best placed to do so as they'll know your specific situation which posters here won't do.

lozzy1965

I'm no expert either, but I believe you would have to pay yourself as though you were paying a salary to get the government contribution - ie. they would pay you back the 'tax' into your pension? So to get more than 20K you have to take more than 20K out of your company. I believe you can make an employer contribution direct to your pension as an allowable company expense, therefore coming out before any taxes are paid.
Any experts out there please do correct me if I am wrong.

kidmugsy

room_101 wrote: »

I've got a small limited company (contractor) of which I'm the sole employee and I would like to take £20k out of the company. I'm happy to put it to either a pension or dividends.
I've got £5k allowance on the dividends and then it increases to 7.5%.

As I understand it (also no expert) you can take the £5k tax-free; there are no complications unless it puts you above the higher rate threshold i.e. £45k in 17/18.

The company can pay the 15k into the pension for you. That reduces the company's profits by £15k and therefore saves the company 20% in Corporation Tax (assuming that it makes a profit of more than £15k).

Whereas if you took the £15k as divis the company would pay 20% tax and then you'd pay 7.5% so that in total 26% would have vanished in taxes.

MoneySavingUser

What other income do you have?

room_101

I have £130k in S&S ISA - reinvested
Interest on £100k savings - not very much in terms of interest earned
£11,000 salary from company
Approx £10,000 pa in expenses from company

Sean473

room_101 wrote: »

I have £130k in S&S ISA - reinvested
Interest on £100k savings - not very much in terms of interest earned
£11,000 salary from company
Approx £10,000 pa in expenses from company

Honestly, just drop as much as you can in a pension... With the government topping it up, it's free money! Especially if you don't need the 5k cash right now..

MoneySavingUser

room_101 wrote: »

I have £130k in S&S ISA - reinvested
Interest on £100k savings - not very much in terms of interest earned
£11,000 salary from company
Approx £10,000 pa in expenses from company

Drop the salary to £8k to avoid NICs on the excess;

Take the rest of the personal allowance as dividend (£11,500-£8,000 = £3,500).

Take £5k as a dividend @ 0% tax'
Remaining £15k into a pension as an EMPLOYER (gross) contribution.

Sean473 wrote: »

Honestly, just drop as much as you can in a pension... With the government topping it up, it's free money! Especially if you don't need the 5k cash right now..

No govt. topup on employer contributions as already gross but get CT relief.

If salary is £8k could still put in further £6,400 though and get the topup (even better as no tax paid on the £8k in the first place).

Live off the savings for now.

room_101

Why do you advocate not paying NI contributions which ensure I get my state pension?

Thanks for the advice. I'm going to take £5k dividend and then put the rest into a pension.


As an aside - when I paid out my annual salary I messed up and paid it out on the 6th April. Hence I'd no salary payment made to me (employee) in the 16/17 tax year. Is this an issue? I've already made my accountant aware of this, but I just realised there now when looking through my statement that it could be an issue.


Thanks.