It's a perennial question.
Limited company shareholder starts to exceed £40K and doesn't want to get stuck for extra tax on dividends. Besides pensions and additional family members as shareholders what do others here recommend?
It comes up again and again this one.
Thanks in advance
Replies (13)
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Apologies
It comes up from clients again and again. From your bad tempered reply I guess you mean it comes up here again and again.
Sorry, I thought you meant it comes up here again and again. Which it does seem to often enough, so I couldn't understand why you were asking it.
But it's as much as I can do to stop myself ranting at my own clients that they should just be grateful they are in such a lucky position and to pay the tax, since there are many out there who would love to be in a position to pay higher rates. Being asked to help keep your clients from paying the tax that they should get off their butts and pay just wound me up for a moment there. But you are right, they do always ask.
Don't pay dividends?
Unless there has been a change in the law I missed, I'm pretty sure no-one is forced to take dividends. Not taking dividends that would incur a higher rate tax liability solves the problem admirably.
I find substantially increasing the accountancy fee takes the problem away from the client ,albeit his accountant needs to take the burden on his/her shoulders instead.
If the client wants/ needs to extract the excess profits taking him/her into higher rate then there is a cost, he needs this explained to him/her- there is no magic cure.
There is always a balance between instant gratification and deferred enjoyment, different clients have different priorities.
If he is happy with the company pension contribution route fine (subject to contribution limits, of course)
You could also suggest either individual gift aid payments to extend the basic rate band or company charitable payments to reduce distributable profits. No financial benefit to him but maybe buys him a nice warm glow.
Then of course the various investment reliefs spring to mind, VCT,EIS et al, however my sorts of clients tend not to leap at these and I don't really blame them; unless the client already has an established portfolio of investments it seems somewhat strange encouraging him to run before he can walk.
Comparison
I always find it helpful to draw on the beneficial comparison between the higher rates for income tax and higher rate for dividends. Unfortunately when the client reaches this level there will be some tax to pay when drawing additional income.
Can't tell from the OP but is the increased earnings a one-off or going to be regular in the future.
If the former, can he take part as a loan and then repay in following tax year with a dividend that doesn't take him in to higher rates and also within 9 months of year end so no s.455. Or simply put up with the s.455 at 25% which will at least be repaid when he can repay the loan in a tax year when he is not higher rates.
tax relief
From a financial planning perspective, you may wish to advise your clients to make their personal pension contributions, company sponsored instead, furthermore, the costs borne out of the contributions to life insurance and income protection, which is often paid out of earned income, can instead be met by the company and benefit from tax relief. You would be surprised how many ‘hundreds’ if not ‘thousands’ clients pay in financial planning costs out of earned income, just a thought
Darren