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I have been running a profitable business for a number of years and would like to extract some cash from the company in the near future. Should I do this now, or wait for the top 50p tax rate to be reduced next year?
Craig Kemsley, private client partner at Grant Thornton UK, says that if a business has been profitable for a number of years, with a build-up of cash on the balance sheet and available distributable reserves, there are a number of ways the money can be accessed by a shareholder. The details of exactly how it can be done will depend on the situation, such as cash flow requirements of the shareholders and of the company.
Following the 2012 budget announcement, the 50p tax rate is due to reduce to 45p from April 6 2013. This leaves the possibility of delaying any payments from a company until this date, to access the lower additional rate tax band. This should only apply if you have income of over £150,000. Below this and the tax bands are broadly similar across the two tax years.
If the cash available is over this amount, the way to access a slightly lower marginal tax rate is by delaying payments to yourself – through a dividend, for example – until the 2013/14 tax year. The higher the amount over the £150,000 limit, the more difference in tax there will be.
An easy way to work out the tax saving of delaying payment would be to apply the effective rate of tax on the amount of the dividend payment that is taxed above £150,000. The new effective rate of tax in 2013/14 will be 30.5 per cent for additional rate payments on dividends, compared with the current 36.1 per cent. Therefore if you wait for a year you will save just over 5.5 per cent on any cash you take out that is above the £150,000 starting point.
Salary and bonus payments can also be deferred until the 2013/14 tax year in the same way as a dividend, as explained above, however the saving in tax would simply be a tax reduction of 5 per cent in the additional rate band.
Other ways to reduce the amount of tax paid, include gifting shares to a spouse, to take advantage of their lower tax band, if this has not already been used up by the spouse’s other income. This would save the original shareholder paying tax at the higher marginal dividend rate. Gifts of shares to a spouse must be an outright gift, so it won’t have any further income tax implications for the original shareholder.
It should also be considered whether you have plans to wind up the company or sell it in the near future. If this is the case, you would have the option of allowing the cash generated from profits to build up on the company balance sheet and then liquidating the company or selling the shares. The sale or liquidation of the company should give rise to a capital gain taxable at 28 per cent, or 10 per cent if the conditions for entrepreneurs’ relief are met.
Broadly, these conditions are that the company must be a trading UK trading company and that the shareholder must have been an officer or employee of the company for the 12 months before the sale. On this latter point the shareholder must own at least 5 per cent of the issued share capital and voting rights.
Other points to consider are that cash retained within the company will be subject to corporation tax and holding large amounts of cash on the balance sheet may alter the availability of entrepreneurs’ relief.
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