Key Post Most tax-effective way of taking profits and cash out of a company

North Star

Registered User
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224
This is the wrong idea. You should pay the profits each year as income and use the net receipts to pay down your mortgage.

As the OP has the benefit of a PAYE job and a Ltd company, there are options to build up reserves in the company and look at options such as Entrepreneurial relief, Retirement relief , termination payments pension funding, and liquidation at CGT rates etc to get funds out of the company in a much more tax efficient manner. Build up the reserves in the company and invest in the company name if you so wish ( i.e. treat it as a pension to generate some returns ) and at some point down the road you may well be able to generate a large lump sum to materially pay down mortgage debt rather than in increments when you have already paid an effective tax rate of 50%.
As the reserves in the company are liquid you have the flexibility to change your strategy if required and pay yourself a salary in any year you so wish.
The tax efficiency will reduce the time it takes to become mortgage free instead of paying down debt out of after tax funds.

Just a different approach to meet the OP's objectives

Vincent
 

Brendan Burgess

Founder
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44,659
Hi Vincent

Very interesting points and I think it's worth teasing this out. It's got more complicated since I first advocated clearly against leaving cash in a company.

I have copied this to a new thread and made it a key post as the issue will apply to a lot of people.

First of all, it's important to point out that if people leave profits in their company, they will pay Corporation Tax at 12.5% on them.

If they subsequently pay the cash into a pension scheme. That would be a terrible waste of tax.
If they subsequently pay themselves salary out of it, again it would be a waste of tax.

If you have a plan to wind up the company in the medium term - say 5 years, the proceeds will be subject to Capital Gains Tax at 33%. So there is not much saving there. In the meantime, the net cash could have been used to pay down the mortgage and get a tax-free return equal to the mortgage rate.

Should they plan for Termination payment pension funding or Retirement Relief?
If they are approaching retirement and expecting to retire this is worth considering.
But they will have given up 12.5% of it in Corporation Tax.
Would it not be better and simpler to put it into a pension?

If they are in their 30s, I don't think that they should be planning for this.

Should they apply for Entrepreneurial Relief?
So they pay 12.5% Corporation Tax.
Then if they qualify for Entrepreneurial Relief, they will pay 10% CGT.

Clearly 22.5% is a lot less than 53% in income taxes.

I still think it would have to be on the medium term horizon to plan for it.
 

Brendan Burgess

Founder
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44,659
Vincent

Could you do a case study of where it's clearly better to leave cash in the company and avail of one of these reliefs?

Brendan
 

North Star

Registered User
Messages
224
Hi Brendan,

yes I can provide a outline case study to illustrate some of the key points for consideration. I generally agree with your point that this type of approach resonates most with those in 40s/50s who can see a realistic timeline for exit/sucession planning. Interestingly we have some younger high earning Company owners who want financial freedom by an early age, who are also looking at such strategies. Please leave that with me for a couple of days.
Thanks Vincent
 
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