Money out of company and into pension - options?
Discussion
Afternoon all,
My LTD has some surplus funds and I am looking at ways of withdrawing it tax effectively. I own the company outright and there are no other shareholders.
Assume that I have no pension annual allowance for this year or prior years. Also assume that the company and I won't need access to the funds and that I have no available ISA or appetite to look at VCTs and the like.
One option is that I pull it out, pay dividend tax and then tax on the investment income / growth. All these funds would go into my estate upon death but i can do what i like with it in the meantime.
Or, I dump it into my personal pension as a company contribution and pay 45% excess pension contribution tax but crucially I get tax free growth, corporation tax relief and also the funds would not fall into my estate. So, take £1,000 increments to illustrate the arithmetic. For each £1,000 i put into my pension this way I end up with £550 in my pension growing tax free and also save £250 of corporation tax which is c.£150 in my hands if i took that saving and paid it out as a dividend. When i retire (maybe 10 years from now) and draw that cash out i would pay tax at that point (and some tax free if that is still an option) so there is another tax charge to consider. I guess that extra tax charge has to be offset by the growth in the meantime for it to be worth it.
In contrast, if i take each £1,000 as a dividend I end up with around £600 in my hands after tax, but am taxed on future growth.
So, i think this means taking the excess pension contribution tax is worth it. Or am i missing something crucial?
I appreciate that this may change under a Labour Government.
Thansk all!
My LTD has some surplus funds and I am looking at ways of withdrawing it tax effectively. I own the company outright and there are no other shareholders.
Assume that I have no pension annual allowance for this year or prior years. Also assume that the company and I won't need access to the funds and that I have no available ISA or appetite to look at VCTs and the like.
One option is that I pull it out, pay dividend tax and then tax on the investment income / growth. All these funds would go into my estate upon death but i can do what i like with it in the meantime.
Or, I dump it into my personal pension as a company contribution and pay 45% excess pension contribution tax but crucially I get tax free growth, corporation tax relief and also the funds would not fall into my estate. So, take £1,000 increments to illustrate the arithmetic. For each £1,000 i put into my pension this way I end up with £550 in my pension growing tax free and also save £250 of corporation tax which is c.£150 in my hands if i took that saving and paid it out as a dividend. When i retire (maybe 10 years from now) and draw that cash out i would pay tax at that point (and some tax free if that is still an option) so there is another tax charge to consider. I guess that extra tax charge has to be offset by the growth in the meantime for it to be worth it.
In contrast, if i take each £1,000 as a dividend I end up with around £600 in my hands after tax, but am taxed on future growth.
So, i think this means taking the excess pension contribution tax is worth it. Or am i missing something crucial?
I appreciate that this may change under a Labour Government.
Thansk all!
I expect you’ll get similar replies to your identical question a few weeks ago.
I don’t think you’ll get corp tax relief on excess pension contributions.
If you’ve fully used your carry forward allowance and presumably expect to keep using the full amount going forward you are doing well.
I’d suggest engaging a tax specialist to advise you properly. Or buy an electric car through the business if there is one you think you might enjoy.
I don’t think you’ll get corp tax relief on excess pension contributions.
If you’ve fully used your carry forward allowance and presumably expect to keep using the full amount going forward you are doing well.
I’d suggest engaging a tax specialist to advise you properly. Or buy an electric car through the business if there is one you think you might enjoy.
You can get corporation tax relief on company pension contributions.
There are some caveats but if you've made the profit you can pay it into your pension and get CT but not personal income tax relief if you've already maxed your allowance.
You accountant will know if it will pass the sniff test.
There are some caveats but if you've made the profit you can pay it into your pension and get CT but not personal income tax relief if you've already maxed your allowance.
You accountant will know if it will pass the sniff test.
Thanks for the feedback everyone.
As noted above I have been looking at this option for a while and have taken advice from my accountant and IFA. I am told that I can get CT relief on excess pension contributions made by the company.
My accountant has only seen situations where people inadvertently make excess pension contributions, and not by design. I suppose what i am after is anyone with experience of the issue who can tell me if I am missing something obvious.
Otherwise I think it is just a calculation of taxes to be paid and likely growth in either scenario, with a reasonable assessment of the impact that each may have over (say) 10 years.
Thanks all.
As noted above I have been looking at this option for a while and have taken advice from my accountant and IFA. I am told that I can get CT relief on excess pension contributions made by the company.
My accountant has only seen situations where people inadvertently make excess pension contributions, and not by design. I suppose what i am after is anyone with experience of the issue who can tell me if I am missing something obvious.
Otherwise I think it is just a calculation of taxes to be paid and likely growth in either scenario, with a reasonable assessment of the impact that each may have over (say) 10 years.
Thanks all.
Another left field option... have you considered folding the company and doing something else?
A Members Voluntary Liquidation would let you extract the cash from the Ltd and only pay 10% CGT using Business Asset Disposal Relief (a.k.a. 'Entrepreneur's Relief').
You can't then start a similar company for at least two years, though.
A Members Voluntary Liquidation would let you extract the cash from the Ltd and only pay 10% CGT using Business Asset Disposal Relief (a.k.a. 'Entrepreneur's Relief').
You can't then start a similar company for at least two years, though.
9005rpm said:
Thanks for the feedback everyone.
As noted above I have been looking at this option for a while and have taken advice from my accountant and IFA. I am told that I can get CT relief on excess pension contributions made by the company.
My accountant has only seen situations where people inadvertently make excess pension contributions, and not by design.
Thanks all.
Have they confirmed the pension contributions are commensurate with your role in the business and are wholly and exclusively for the purposes of the trade or profession?As noted above I have been looking at this option for a while and have taken advice from my accountant and IFA. I am told that I can get CT relief on excess pension contributions made by the company.
My accountant has only seen situations where people inadvertently make excess pension contributions, and not by design.
Thanks all.
NorthDave said:
Why not set up a holding company, transfer the spare funds across to it and then invest via the holding company? You can then leave it to appreciate and draw down as income when you need it.
Seems to be a fairly well trodden path.
He's looking to minimise the corp tax, as I understand it, which a holding company arrangement won't assist with.Seems to be a fairly well trodden path.
hi all,
Thanks for the input.
The conclusion seems to be that i can do this if i wish and it boils down to an analysis of tax now (on a dividend and subsequent investment) or some tax now and some later (by overpaying into the pension but having a second tax event at drawdown in future). While the latter would give me a very healthy CT reduction, it is vulnerable to pension tax changes. And who knows what the future holds there ?!?!?
Thanks for the input.
The conclusion seems to be that i can do this if i wish and it boils down to an analysis of tax now (on a dividend and subsequent investment) or some tax now and some later (by overpaying into the pension but having a second tax event at drawdown in future). While the latter would give me a very healthy CT reduction, it is vulnerable to pension tax changes. And who knows what the future holds there ?!?!?
NorthDave said:
Why not set up a holding company, transfer the spare funds across to it and then invest via the holding company? You can then leave it to appreciate and draw down as income when you need it.
Seems to be a fairly well trodden path.
I don’t know the intricacies of this, but a mate has done something like that, with a new company owned by his wife and kids. New company is invoicing the old company and using the money to buy BTL property. Seems to be a fairly well trodden path.
The thing that sounded most odd to me is the new company will have to pay corp tax on the money as buying property for cash isn’t an allowable expense.
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