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!
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.
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 ?!?!?
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