How should you draw your money?
ADAM HOOK examines the possibility of putting your money into a pension, rather than taking it as a dividend or salary
IF YOU’RE the owner of a limited company, aged 55 or over, you may be eligible to take your income via a pension scheme, rather than through a salary or dividend. There are numerous tax advantages associated with this practice.
For owner-managed, limited company businesses there is always the potential to end up paying tax twice. Once your profits are calculated, you have corporation tax to pay but more often than not, the taxman’s slice of your pie doesn’t end there. On top of this, you also have your own personal tax to pay on what you take out of the company.
This, then, throws up the age-old decision of salary or dividends and, in most cases, it is the latter that will give you the overall lowest tax bill. However, while government policy is currently set on reducing the amount of tax your company pays, it is equally focused on increasing taxes on dividends.
Once upon a time, basic rate payers paid no tax on dividend income; they can now pay 7.5%. Higher rate payers have now moved from 25% to an eye-watering 32.5%. For most people, the dividend route still beats paying full salary, but the gap has been narrowed.
But is there a third option? Yes there is and, perhaps surprisingly to some, the solution lies with pensions. Did you know that company owners aged 55 or over, paying higher-rate tax, can use a pension scheme to make huge tax savings, especially when compared to the other two traditional routes?
The savings to be had are significant – in many instances they can easily exceed £10k in a single year. You merely make the most out of the allowances for company pension contributions and then utilise the tax-free portion and array of drawdown options available.
Pensions are still there as prudent and tax efficient retirement planning but they can also be used simply for drawing money from your company and into your pocket, significantly reducing the taxman’s slice in the process.
This could provide a significant benefit to you and your company, and contrary to the popular misconception, you are not tying yourself into a long-term pension commitment, and you do not have to buy annuities. Quite simply, you draw down the whole of your fund in the most tax efficient manner possible.
For most people, the dividend route still beats paying full salary, but the gap has been narrowed