Large cash in ltd company account

Large cash in ltd company account

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I have been contracting for close to two years now. I have a ltd company. I only draw basic rate dividends + minimum salary every year for last two years. It has resulted in large amount of cash in my company account. I have no idea how to deal with it. Is there any legitimate way of drawing that cash without incurring high tax or put it to better place, like putting it in fixed deposits but that won't solve problem in the long run.

Another thing that I don't understand is how HMRC can even charge people over IR35. When I pay 20% CT on my contract earning and only draw basic rate amount. When I draw the same money as salary then also I only pay 20% income tax on even lesser amount (read tax free allowance). One can argue I am missing NI here, but the counter argument to it would be the first 8-9K that comes tax-free, so it' not like stealing tax from HMRC.

Every time I go over basic rate I incur another 25% of on top of 20% CT already paid, which again is higher than 40% personal income tax.

Replies (7)

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Teignmouth
By Paul Scholes
23rd May 2013 13:48

Tough old life isn't it?

IR35 is NI legislation and, if you were employed (instead of feeding the income through a Ltd Company) then a large chunk of the income would suffer 25.8% NI on top of the tax (the company pays 13.8% on top of your 12%).

So, many in the country would rightly say, "if you are effectively employed, and doing the same job I'm doing, how come you pay less than me?"  IR35 tries (badly) to rectify this inequity in our tax system.

If you want more money in your pocket but are worried/annoyed/frustrated that this will raise your tax bill, then again, you are ahead of the employee next door who doesn't have the opportunity to delay or even avoid the extra tax.

If you build a substantial sum of cash in the company and start trying to invest it to get a good rate of return, or even let it build to a huge size, you run the risk of HMRC saying that the company is an investment vehicle rather than a trading concern and could lose Capital Tax benefits from owning a trading company.  In reality it is rare that HMRC follow this line but be aware.

If you need the money, draw it as extra dividend and pay the tax OR borrow it from the company and make the necessary tax declarations (others will comment on that bit).

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By JCresswellTax
23rd May 2013 14:34

sound advice as ever from Paul

This is what you need to know.

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Replying to JHC:
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By Contractor
23rd May 2013 16:33

IR35 is NI legislation, that's fine. But what happens in case of a foreign worker. When a foreign worker gets the permit (read VISA) to work in this country, it's written on the VISA itself "no recourse to public funds".

So HMRC wants to charge Tax + NI from the poor fella, but UKBA wants to make sure he can't get anything back. Also it's perfectly legitimate if the person is working here and still getting paid in his home country, and company from his home country invoices the client in this country. In this arrangement everybody wins, nobody pays any tax in this country.

Why HMRC does then makes it so difficult for the people who want to pay taxes here?

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By Martin B
23rd May 2013 15:45

ir35

flagged

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By Maslins
23rd May 2013 16:28

What Paul said.

If you're looking at ways to get additional cash out, a few options are:

- take extra dividends, and take the personal tax hit.

- stick it in a pension scheme, gets tax relief now, but you can't get your hands on the cash for a while.

- close the company down, where you should be able to get CGT treatment on funds (possibly requiring a liquidation depending upon the balance).

That last option is obviously only valid if you're considering doing something else (eg PAYE role, emigrating, retiring etc).

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By bernard michael
24th May 2013 09:11

It could be worth exploring Entrepreneurs Relief. You should talk to your accountant about whether you still qualify for this. I assume you use an accountant

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By mikewhit
29th Aug 2013 12:36

Live on earnings

Another possibility, if you wanted (!) would just to pay yourself a salary from the cash pile but take a (say) two year holiday/sabbatical, paying tax and NI on your eg. £20k p.a.

Don't forget to submit NIL VAT and CT returns, and keep the Company Registration up to date.

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