BADR - impact on other income/taxes?

DoctorStrange

I may have to close my consultancy and, assuming no changes in the Autumn Budget, I'm hoping to qualify for BADR.

My question is around whether or not monies received from the company closure are aggregated with any other income for any tax purposes?

For example, say I have £515,000 in the company account and after liquidation costs of £15k and BADR of 10%, I receive £450k net in my personal account.

Then assume I secured a full time job paying £180k. Is my total income for the year £180k + £450k, meaning the entire £180k is taxed at 45% + NIC? Or would I still have the same 20% and 40% bands as everyone else on a salary of £180k?

Also, am I still able to pay £80k-160k into my SIPP (using 3 years carry forward), then what's left (e.g £80k or £20k) is taxed at rates applicable to those amounts?

I'm basically trying to work out if there'll be any impact on my salary income from the BADR.

I know dividends for example are added to your total income even though different rates apply, which got me wondering whether or not BADR monies might have any impact I've not considered. 

Hope this makes sense!

Thanks

Dazed_and_C0nfused

Also, am I still able to pay £80k-160k into my SIPP (using 3 years carry forward), then what's left (e.g £80k or £20k) is taxed at rates applicable to those amounts?

I will let others better qualified comment on BADR but you have misunderstood how contributions to a SIPP (or any other relief at source pension) work.

They don't reduce the amount of income that needs to be taxed, they merely increase the amount of your basic rate tax band, meaning more can be taxed at 20% and less at 40%.

They do reduce your adjusted net income which can mean you get the Personal Allowance when it would otherwise be lost.

Al of the above is assuming you do mean "am I".  If you are mixing up yourself and a limited company then it may be different.

DoctorStrange

Sorry, I should have clarified the SIPP contribution would be via salary sacrifice on the £180k.

My understanding is that I'd in effect be agreeing to a lower salary in exchange for employer contributions to my pension, and thus my taxable income is indeed reduced - does that change anything?

Jeremy535897

If you qualify for BADR in respect of the company, you pay 10% tax on the £500,000 (ignoring the annual capital gains tax exemption and any base cost of the shares). That is the end of the tax liability on that amount. See: https://www.gov.uk/business-asset-disposal-relief

If the contribution to the SIPP is by way of salary sacrifice, the salary as reduced by the sacrifice is what you pay income tax on.

dctrgre

If you have not done so already, it would be wise for you to read up on BADR / Entrepreneurs Relief and “cash rich” companies.

Jeremy535897

dctrgre said:

If you have not done so already, it would be wise for you to read up on BADR / Entrepreneurs Relief and “cash rich” companies.

Timing may be key. There is a useful discussion here on the issue, although it pre-dates the current legislation:
https://www.taxinsider.co.uk/entrepreneurs-relief-is-too-much-cash-in-the-company-bad-for-your-wealth

DoctorStrange

My understanding is that the cash would have to generate more than 20% of the income to qualify as "substantial activity".

In terms of timing, I'm actively trading just now which generates over 99% of all income, and the day I cease trading is the day I'll appoint the liquidators.

Does that sound acceptable do you think? Is there any sort of pre-check I can do beforehand to ensure I definitely qualify for BADR?

If I have to pay 28% (or worse 45% if they equalise CGT with IT!) then I'd rather leave the company dormant, or explore other avenues.

Jeremy535897

Have a look at HS275. See example 3:

https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-self-assessment-helpsheet/hs275-business-asset-disposal-relief-2021#Example-3

HMRC manual guidance here:

General https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg63950
Trading company: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64055
Also: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64060

Note clearance application:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64100

DoctorStrange

Thanks - too tired to absorb much of that tonight as been a long day but will try again tomorrow. 

(And there was me thinking tax didn't have to be taxing... )