Most Tax Efficient Way to Extract Funds

lal5002

I will speak to my accountant at the end of our tax year but just wanted to have a rough idea of the best route to tax efficient payment from my LTD company.

I have two roles. One FT PAYE job and a side line business that has done very well over the past 12 months. 

PAYE:
£75k basic
£6k car allowance
£7.5k bonus
Pension plus healthcare

Ltd Company (completely separate sector from PAYE role)
Sole Director (me)
Wife works for company (PAYE £45k)
Turnover £100k
Profit £35k
Cash in account - £40k

I have been reporting losses for 5 years either as a ST or LTD company.

This is first year we have made a profit. We have no losses to carry over as its our first year trading as a LTD company.

I dont need to take the cash out of the business and quite happy to leave it there but dont want to pay 19% CT to leave it if I can pay 20-30% and take it as income/dividends etc. Considering making my wife a director and maxing her dividends as well. Not been a position where we have to deal with a decent amount of profit before. Losses are much easier to deal with  

Any advice on most tax efficient approach to extract some cash would be appreciated. 

DoctorStrange

You can only take dividends from post tax profits, which means paying 19% of £35k first, leaving you with 28k available to distribute.

But, as you've already pretty much maxed your income limits, I'd say you can each take only £2k from the post-tax profits (assuming no other dividend income, and that she becomes a shareholder rather than director) and leave the rest in the company.

There's also the pension side to look at of course, but I'm guessing you're trying to avoid that?


Also, you may need to be careful on your wife's salary as well - HMRC may challenge things if they suspect you of being overly generous (e.g. £45k is a lot to pay for "admin"). Not saying they will - just that they can, so best to make sure you've got evidence that she's being paid the market rate for whatever it is she does for the company just in case

DoctorStrange

Also, just to double check, are you registered for VAT? You need to be once your turnover is over £85k but there's no mention of that in your post - hopefully because it's net neutral to you?

Grumpy_chap

If you are both shareholders, you could take £2k each within the dividend allowance, no income tax, but after corporation tax.

You could dispose of that cash in the bank by buying an EV and your wife has a company car.  EV is able to take full first year write down, so that would wipe the profits this year.  Likely not something you can or would want to repeat year-on-year.

Your wife could put a large chunk into a pension as employers contributions and wipe out the profits that way.

Ask your Accountant ahead of the end of the accounting year so that you can actually complete transactions within the accounting period, rather than be too late.

Yours is a nice problem to have

lal5002

DoctorStrange said:

You can only take dividends from post tax profits, which means paying 19% of £35k first, leaving you with 28k available to distribute.

But, as you've already pretty much maxed your income limits, I'd say you can each take only £2k from the post-tax profits (assuming no other dividend income, and that she becomes a shareholder rather than director) and leave the rest in the company.

There's also the pension side to look at of course, but I'm guessing you're trying to avoid that?


Also, you may need to be careful on your wife's salary as well - HMRC may challenge things if they suspect you of being overly generous (e.g. £45k is a lot to pay for "admin"). Not saying they will - just that they can, so best to make sure you've got evidence that she's being paid the market rate for whatever it is she does for the company just in case

Thanks for the advice.

We are both paying lots into pensions through work so trying to avoid paying any more in.

Also, my wife's £45k is PAYE through her employer, completely separate from the LTD company. I was thinking around £5k salary through the business as she does a fair amount of manual work in the LTD company that she has never received payment for. 

lal5002

DoctorStrange said:

Also, just to double check, are you registered for VAT? You need to be once your turnover is over £85k but there's no mention of that in your post - hopefully because it's net neutral to you?

Yes. Registered for VAT

lal5002

Grumpy_chap said:

If you are both shareholders, you could take £2k each within the dividend allowance, no income tax, but after corporation tax.

You could dispose of that cash in the bank by buying an EV and your wife has a company car.  EV is able to take full first year write down, so that would wipe the profits this year.  Likely not something you can or would want to repeat year-on-year.

Your wife could put a large chunk into a pension as employers contributions and wipe out the profits that way.

Ask your Accountant ahead of the end of the accounting year so that you can actually complete transactions within the accounting period, rather than be too late.

Yours is a nice problem to have

Thanks for the comments.

Really interesting with regards to EV.

My wife has a EV through her employer but I drive a pick up truck that I own.

I'm looking at maybe selling that to the LTD company but I would imagine it would take a few years to write that off as its a diesel guzzler. Probably worth around £20k.

Its a nice problem but we've made substantial losses over the past 5 years, so yet to break even. 

I dropped my accountant an email and we are having a chat end of the week before year end in May.

Grumpy_chap

lal5002 said:

I dropped my accountant an email and we are having a chat end of the week before year end in May.

Is one week enough, if you are considering options that involve vehicles within the company?  I think the vehicle has to be fully invoiced in the accounting period and invoice is usually at delivery date.

DoctorStrange

lal5002 said:

Also, my wife's £45k is PAYE through her employer, completely separate from the LTD company. I was thinking around £5k salary through the business as she does a fair amount of manual work in the LTD company that she has never received payment for. 

Sorry, I assumed that was the primary source of expenses, which cut turnover of 100k to profit of 35k. £5k for a little work is fair and HMRC should have no issue. 

Paying her a salary up to the HR bracket makes sense (you'll pay 20% IT rather than 19% CT, but for that 1% you've got it out the company) but remember if she gets overtime or bonuses these could fall into the HR bracket so be careful 

After wages, the tax fee dividends is the next step.

After that, it's really down to expenses. Do either you or your wife work from home? You can perhaps pro-rata some energy costs if so?

What about computers/laptops/office equipment - do you need any of that? Mobile phones even? Anything you can switch from personal to company might be doable so long as it's justified.

Another option of course is to simply leave the money alone. Your day to day expenses are being met,  your pensions are fine,  so perhaps consider the company a "half pension" on which you've paid 19% tax for the price of flexible access - might be useful if you're thinking of early retirement?

[Deleted User]

DoctorStrange said:

lal5002 said:

Also, my wife's £45k is PAYE through her employer, completely separate from the LTD company. I was thinking around £5k salary through the business as she does a fair amount of manual work in the LTD company that she has never received payment for. 

Sorry, I assumed that was the primary source of expenses, which cut turnover of 100k to profit of 35k. £5k for a little work is fair and HMRC should have no issue. 

Paying her a salary up to the HR bracket makes sense (you'll pay 20% IT rather than 19% CT, but for that 1% you've got it out the company) but remember if she gets overtime or bonuses these could fall into the HR bracket so be careful 

After wages, the tax fee dividends is the next step.

After that, it's really down to expenses. Do either you or your wife work from home? You can perhaps pro-rata some energy costs if so?

What about computers/laptops/office equipment - do you need any of that? Mobile phones even? Anything you can switch from personal to company might be doable so long as it's justified.

Another option of course is to simply leave the money alone. Your day to day expenses are being met,  your pensions are fine,  so perhaps consider the company a "half pension" on which you've paid 19% tax for the price of flexible access - might be useful if you're thinking of early retirement?

I had also considered paying the op’s wife up to £5000 to fully utilise the HR band it appears that she also has a company car at her main employment.

DoctorStrange

[Deleted User] said:

I had also considered paying the op’s wife up to £5000 to fully utilise the HR band it appears that she also has a company car at her main employment.

Yeah good point.

Feels like the only sensible answer now is "double check everything with the accountant" 😀