What to do with company profits

danwednesday

Hi,

I recently set up a limited company to try to save tax by withdrawing a minimum salary then taking the rest of my salary as dividends.

The question is, since I can't find any high-interest business bank accounts, what should I do with the profits that are building up in the account (i.e. the money that I'm not drawing out to live on)?

If I take it all out to put into a high interest savings account, then presumably I'll be taxed on this at the rate that dividends are taxed (not sure what this rate is)? Should I be investing this in pensions or something else?

Any advice on what would be most tax efficient would be greatfully received, thanks folks!

Pennywise

Try www.caterallen.co.uk for a limited company bank account that pays a decent rate of interest on savings.

The company can pay fairly large amounts into your pension scheme, but you can't get it back and has to stay within a pension plan. You could set up a self admin pension plan with a view to using the funds to buy a commercial property if that's what you want to do, rather than the money being invested in the usual mix of stocks/shares etc.

You can take out post tax profits as dividends and won't pay any more personal tax until your total income exceeds the personal basic rate band. It makes sense to take such a dividend whether you need the money or not as it costs nothing to take it out.

Dividends over the basic rate band will be taxed at a further 25% higher rate tax on you personally.

silvercar

I agree with Pennywise, take out enough to use up your basic rate tax allowance, it won't cost you any extra.

If you don't take out in each tax year, you will lose the opportunity.

May not be relevent at the moment, but an advantage of a limited company is that you are protected if it went belly up. If there is loads of money sitting in it the value of being limited is minimised.

danwednesday

Thanks guys. I'm not 100% sure I'm following correctly though - can I just check some things...

My plan is to withdraw the maximum allowance of £5225 (I think?) which is exempt from income tax, and then take the rest of my required income as dividends (which would be taxable at 10% if I withdraw less than £34,600?). This is what I'm doing currently - though it's my first year trading hence the uncertainty. Currently the rest of my company earnings are sat in my business current account, earning <0.5% interest, pending some kind of investment. Are you saying that I should take all of the 'spare' money out of the company as dividends and invest it in high-interest accounts, therefore, in total I'd be paying no tax on the first £5225 (taken as a salary) then 10% on the following £34,600 (as dividends) then 32.5% on the remaining amount as dividends?

Thanks for your advice on this, I think I'm starting to get it!

johnllew

danwednesday wrote: »

The question is, since I can't find any high-interest business bank accounts,

A&L have some good accounts:

https://www.alliance-leicestercommercialbank.co.uk/content/SB020001.asp?cm_mmc=Group-_-Retail-_-Quick%20Link%20Dropdown-_-Business%20Deposit%20Account

Instant Reserve pays up to 5.47% AER.

30 Day Notice pays up to 5.59% AER


Or, Kaupthing Singer & Friedlander:

http://www.kaupthingsingers.co.uk/treasury/premierbaseratetracker.htm

pay up to 5.75% AER on their Premier Base Rate Trackers (min £25k). I use KSF for my company savings and find them to be fine. I also use the A&L for company day-to-day money and while customer service is crap, the website is OK.

CannyJock

danwednesday wrote: »

Thanks guys. I'm not 100% sure I'm following correctly though - can I just check some things...

My plan is to withdraw the maximum allowance of £5225 (I think?) which is exempt from income tax, and then take the rest of my required income as dividends (which would be taxable at 10% if I withdraw less than £34,600?). This is what I'm doing currently - though it's my first year trading hence the uncertainty. Currently the rest of my company earnings are sat in my business current account, earning <0.5% interest, pending some kind of investment. Are you saying that I should take all of the 'spare' money out of the company as dividends and invest it in high-interest accounts, therefore, in total I'd be paying no tax on the first £5225 (taken as a salary) then 10% on the following £34,600 (as dividends) then 32.5% on the remaining amount as dividends?

Thanks for your advice on this, I think I'm starting to get it!

Way I worked mine out was to add together my tax free allowance and the £2230 10% band together. That's the maximum that I'll pay myself through PAYE (means a little bit extra NIC, but not much). As a company director your NI is skewed towards the end of the year anyway.

I leave room for interest on my savings to be counted as income and estimate that.

I then take out two dividends a year to bring me just inside the higher rate tax band.

Having handed over huge amounts of tax as a higher rate tax payer in loads of previous years, I'm happy to juggle things a bit to avoid that now that I've got my own business.

You can also make reasonably generous pension payments too. And as a company director, you might want to look into the rules around company loans where you can "borrow" up to £5K from the company interest free for a period of time.

EDIT: You can't just take money out of Ltd company account and put into a high-interest personal account. You'll end up being done with embezzling from your own business Or at the least it'll be classed as a benefitial loan and you'll need to pay interest on it. Best to get a higher interest business reserve account. I've got the Lloyds TSB "business savings" account that only pays around 3.3% but at least it's gross and it's better than 0.1% in my normal account.

Elaine_Wilson

Just thought I'd mention that when doing your calculations the dividend figure should be grossed up.

So if the company had profits (after paying your salary) of £10,000 there would be corporation tax of £2,000 to pay. The balance of £8,000 could be withdrawn as dividend but you would treat this as a gross dividend of £8,889 with a notional tax credit of £889.

johnllew

danwednesday wrote: »

I should take all of the 'spare' money out of the company as dividends and invest it in high-interest accounts, therefore, in total I'd be paying no tax on the first £5225 (taken as a salary) then 10% on the following £34,600 (as dividends) then 32.5% on the remaining amount as dividends?

Why take that much out - better to leave it in the company taxed @ 20/22% than at your higher rate.

CannyJock wrote: »

EDIT: You can't just take money out of Ltd company account and put into a high-interest personal account. You'll end up being done with embezzling from your own business Or at the least it'll be classed as a benefitial loan and you'll need to pay interest on it.

You would be OK taking up to £5000 out at any one time; that amount is not illegal AFAIAA and no beneficial loan interest is payable. Just make sure you pay it back within 9 months of the end of the company's year to avoid a S419 charge.

chappers

Its really amatter of what you want to do with the money eventually you will want to take it out i'm sure and will end up paying tax on it maybe better to take it out each year and pay tax at a lower rate than to take it all out in one go in the future and pay a higher rate of tax on it.
It may be tax wise to put them into a pension but you probably won't be able to get them back again,in the meantime maybe a business savings account is the way to go.
Do you have a spouse who maybe isn't working and could be paid up to her tax allowance or who may be a lower tax rate earner and could be paid upto her lower tax limit.
Speak to your accountant is the best thing to do.

danwednesday

Thanks for your pointers folks - I think I do need to read up on all the various taxes because I really don't think I understand at all.

CannyJock wrote: »

You can't just take money out of Ltd company account and put into a high-interest personal account. You'll end up being done with embezzling from your own business Or at the least it'll be classed as a benefitial loan and you'll need to pay interest on it. Best to get a higher interest business reserve account. I've got the Lloyds TSB "business savings" account that only pays around 3.3% but at least it's gross and it's better than 0.1% in my normal account.

I don't understand this. There must be a way to get money out of a limited company without it being classed as embezzling. Could I not, in theory, just give myself a huge bonus at the end of the year? Is that illegal? Am I correct in saying that it's classed as illegal if you don't declare it as a salary, but it's okay to do this if you do declare it as a salary - at which point though it's taxed at a high rate so not worth doing?


I have some basic questions which I think are fundamental to my basic understanding of this. Would someone be kind enough to answer these? I'm the type of person who prefers to find out how this type of thing works rather than going blindly to a professional who will likely baffle me with detail and might not always give me the best impartial advice (I know they should, but in reality I always feel vulnerable if I don't know exactly what I'm talking about).

Okay, so some questions... To make things simple (round numbers) assume that my company makes £60,000 per year, and I withdraw £10,000 to live on (so total £50,000 theoretical profit).


1. Will the profits (of £50,000) be taxed automatically? Is this the 20% corporation tax?

2. When is corporation tax payable? The financial year end (April 5th) or my company's year end (August)?

3. If I draw money from the company that is less than the minimum threshold limit (£5225) am I correct in saying that if this is the only income I have in a year, this will not be taxable as income tax?

4. I will need more than £5225 to live on per year, so will need to withdraw, say another £4775 - to give me a nice round, theoretical £10,000 per year to live on (as I mentioned above). I have been advised to withdraw this £4775 as dividends. How is this total £10,000 then taxed? Are dividends taxed at a different rate to income tax, or is the whole £10,000 just treated as a lump of salary, liable to income tax?

5. So, at the end of the year, I've then got £40,000 left (£50,000 minus corporation tax @20% - is this correct?)

6. With the final post-tax profit, my only options are to invest this in a pension, or to keep it within the company - hence preferably opening a higher interest business current account?

7. If I wanted to draw out more money to invest in a personal venture or even to spend, how would I go about this without it being embezzlement? Would it be taken as dividends? If so, very simply, how would this be taxed? (I guess my question above really asks this)



Thank you very much folks, I'm really embarrassed by the gaps in my knowledge, and I really don't know where else to turn to get this kind of basic understanding. I have an accountant, but he just completely baffles me with every sentence he says - so I feel completely vulnerable. When I look at the inland revenue website, I don't understand enough of the principles to understand exactly what's going on. With a little understanding of the above, I can then leave you guys alone and build on my knowledge by looking at other more in depth websites etc, to make sure I'm getting the best advice.

Thanks again...

silvercar

Don't be embarassed, better to understand now than just hope that an accountant fully knows your needs. I was in a similar situation once you get the hang of it it is easier. My explanation here is my understanding and probably uses different words than an accountant would use.

All the talk of fraud, embezzlement etc is refering to you putting company money in your name in order to access high interest accounts/ investments. Once you take money out of the company you need to declare this and how you have done it. Of course, it is your company, your money and you can take it out - you just have to declare how you are doing it, by way of your personal tax return.

The basics, in line with what your accountant seems to be saying, is that the first 5,000 odd comes out as PAYE to use your personal allowance, the next £30,000+ is a dividend which, having already paid corporation tax on profits within the company, is assumed to be a net amount with a (ficticious in my mind) 10% tax having been already paid. So on your tax return it goes down as £33,000 gross dividend, £30,000 net dividend, £3,000 tax credit.

You may as well do the above every year your company can afford it, as it is a tax efficient way of drawing money from the company.

The next bit gets trickier:

you could leave the money in the company, but how will you ever get it out?
you could pay into a pension scheme, which means no further tax to pay, but then you won't have access to the money til retirement.
you could bite the bullet, take the money out and pay higher rate tax on it. This works out at something like 32.5% as you still have this assumed tax credit of 10%.