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

EDP Norfolk - - Finance -

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

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