The well-known routes to take money out of your limited company are by way of salary and dividends. However, there are some alternatives:
Pensions remain a very tax efficient way of extracting money by way of corporate contributions. As a reminder:
- There is no tax or National Insurance on pension contributions
- Growth in the fund is tax-free
- Contributions are generally treated as a business expense so reduce profits and tax
- Up to £40,000, each tax year can be paid into pensions
- It may be possible to utilise unused contributions from previous years
- Pensions do not generally form part of your estate for Inheritance Tax purposes
- The money is outside of your business
Venture Capital Trusts (VCTs)
As an alternative to pensions, VCTs offer very generous tax relief, however, you have to have paid the tax to be able to reclaim the tax. With a VCT:
- The investment is in young growth-orientated companies
- These investments are high risk and you could lose all of the invested capital
- You can invest up to £200,000 per tax year
- You will receive a tax rebate of up to 30% on the amount invested. However, please note the tax rebate is restricted to the amount of income tax paid
- Shares must be held for at least five years to permanently keep the tax rebate.
- If the shares are disposed of within five years of issue, a clawback by HMRC of any income tax reliefs originally
- Dividends will be free of taxation
- On disposal, any gain will be exempt from capital gains tax
For example, ignoring personal allowances and assuming income is only chargeable to basic rate tax, if you were to draw a dividend of £37,500, tax payable would be £2,662.50. If you were to pay £8,875 into a VCT, tax relief would be £2,662.50. In this example, you have taken £37,500 from your company, paid £8,875 into a VCT and got back all of the tax paid on the dividend and still got cash of £28,625 to spend or invest as you wish.
If you did this for five years, you would have invested £44,375, received £13,312.50 tax relief, then from year six, if you were to reinvest the maturing holdings each year, with no growth, you would receive further tax relief of £2,662.50. Do this three times and from year 16, in effect, HMRC are funding your investment, as you would have received back more in tax relief than the original investment and still have the value of the VCT.
Please contact Chris Slatter for further information
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.