Salary from a Non Trading Ltd Company

Can a Non Trading Company Pay Salary Out of Retained Profits?

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Hi,

I am around 5 years away from retirement. I run my own Software Consultancy and am the Company's only employee. My wife is the only shareholder.

My idea was to to get as much retained profit in my business over the next 5 years. That way, I could take an annual salary during retirement, for around the next 10 years after retirement e.g. if I had £250K of retained profit, I could approximately take a £25K salary for 10 years once retired.

I have heard that you cannot do this if the limited company is not trading.
Mine will not be trading as I would have retired.

Please can someone advise whether this is true or not?

Thanking you for your reply.

 

Replies (23)

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the sea otter
By memyself-eye
16th Jan 2024 20:02

If you have, or expect to have £250k of retained profit - you can afford to pay for proper advice.

There are other issues in play here.....

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By Ruddles
16th Jan 2024 20:07

What is it with IT consultants and free tax/accounting advice?

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By Wanderer
16th Jan 2024 20:10

You've either misunderstood or not bothered to look at what this site is for.

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By Wanderer
16th Jan 2024 20:14

JazzJat wrote:
Salary from a Non Trading Ltd Company
Can a Non Trading Company Pay Salary Out of Retained Profits?

Hi,

I am around 5 years away from retirement. I run my own Software Consultancy and am the Company's only employee. My wife is the only shareholder.

My idea was to to get as much retained profit in my business over the next 5 years. That way, I could take an annual salary during retirement, for around the next 10 years after retirement e.g. if I had £250K of retained profit, I could approximately take a £25K salary for 10 years once retired.

I have heard that you cannot do this if the limited company is not trading.
Mine will not be trading as I would have retired.

Please can someone advise whether this is true or not?

Thanking you for your reply.

 

Thanks (0)
RLI
By lionofludesch
16th Jan 2024 20:55

You can do this.

Thanks (3)
Replying to lionofludesch:
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By FactChecker
16th Jan 2024 21:49

You can also cross the motorway with your eyes closed - equally not recommended.

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DougScott
By Dougscott
16th Jan 2024 22:42

You need proper advice mate.

Thanks (1)
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By RFL H
17th Jan 2024 11:30

When you hire your accountant you will be shown a much more tax efficient way to extract the funds.

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Replying to RFL H:
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By JazzJat
18th Jan 2024 17:34

My accountant has told me that it will not be a problem.
But reading up on this, I am not too sure he is correct.
I think I may need the services of a tax specialist rather than an accountant, but I may be wrong.

Thanks (0)
Replying to JazzJat:
RLI
By lionofludesch
18th Jan 2024 18:08

JazzJat wrote:

My accountant has told me that it will not be a problem.
But reading up on this, I am not too sure he is correct.
I think I may need the services of a tax specialist rather than an accountant, but I may be wrong.

You can do it. The question is, is there a better way.

If you've ceased trading by the time you draw it out, you'll pay tax on the salary but you won't get any corresponding Corporation Tax deduction. In effect, you'll be paying tax on money you've already paid tax on. Not to mention NI.

You need to see a decent accountant with all the facts in front of him. You've just come out with a very relevant bit of information not previously mentioned which is exactly why using an internet forum is not a great idea.

Thanks (1)
paddle steamer
By DJKL
17th Jan 2024 12:42

An insolvency practitioner is maybe (though maybe not) the way to go, hopefully one on here will get in touch and advise likely costs, though you would want to check BADR was available. Other thought given future income wish is part of funds used for company pension contribution whilst it is still trading (may also help with any IHT planning), but the catch is nobody can really advise without fact finding you hopes, dreams, aspirations and concerns, and that tend to need a face to face meeting with an accountant.

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By Tables Force
17th Jan 2024 18:32

Looks like OP decided to go for a second opinion:

https://www.ukbusinessforums.co.uk/threads/can-a-non-trading-company-pay...

(obviously, he will be asking his accountant who is just quite busy at the moment)

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Replying to Tables Force:
paddle steamer
By DJKL
18th Jan 2024 09:12

At this time of year your last sentence, like a stopped clock, could actually be correct

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By slowthinker
18th Jan 2024 10:43

As a consultant in a similar position to you, I recently looked at the ways to minimise tax paid on money earned by the limited company. After using up personal allowance and dividend allowance, the best was to make company contributions to a private pension. I would also look to pay in enough to reduce the retained profits, and so get a refund of corporation tax.

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Replying to slowthinker:
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By JazzJat
18th Jan 2024 17:31

Thank you for that.
I can only pay in £10,000 a year into my pension as I triggered my mpaa a few years ago when I took all of my private pension out. Seemed a good thing to do at the time, now it seems really daft :(

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By blox
19th Jan 2024 04:38

@JazzJat I saw your post on Business Forums where you say "As its retained profit, the only tax should be PAYE."

What members here are trying to tell you is that you will be paying MUCH MORE tax to HMRC this way. Almost 20% more. That's fine if you do not care.

Take your proposed future salary of £25,000 paid from retained profits.

To be able to pay the gross salary of £25,000 from retained profits, the company would have to make a profit of around £33,572 on which the company would pay £6,378 in Corporation Tax (assuming CT of 19%) and then at the time of paying the salary out, the company would have to pay Employers NI (13.8 above salary of £9100 = £2,194), Income tax (assume 20%, = £5000) and Employee Nl of £1,243 .

Add this all together and you get total monies paid to HMRC of £14,815 (of which the company already paid £6,378 earlier via Corp. Tax) which is in total 44% from your originally earned amount used in this example. So because of Employer NI, you would reduce your retained profits by £27,194 in order to get your gross salary of £25,000 and after PAYE the net salary of 18,759.

(For the sake of personal tax calc example above, I am assuming your personal allowance is taken by other income and that you would remain in 20% tax bracket -again, factors not known and calc may be different!).

If instead of paying yourself salary you are able to take yearly dividend of £25K (e.g. wife gifts shares to you once you stop working) then the dividend tax on £25,000 would be 8.75% (£2,187) and the total tax (CT earlier + Div Tax now) would be £8,052 saving yourself £6,763. The total tax that you would pay to HMRC (incl. earlier already paid 19% CT) would be 26% of the original gross profit, saving approx. 18% in tax.

(I ignored dividend tax allowance in this rough calc, may not exist in a few years time anyway).

So salary gives you one figure, dividends give another (but for you to get dividends there must be share transfer which can be done between husb. and wife, again, unknown here what are your personal circumstances and whether the wife is willing...)

The third possibility is that you could apply for BADR, you would have approx £4K MVL costs and the CGT tax of 10%, but you could take the whole amount out from the company at once and close the company, then invest the money in easysaver accounts / fixed interest accounts and draw down £25K yearly from it. However for BADR you need to be a shareholder for at least 24 months, so your wife would need to gift you shares couple of years before you stop working. Another unknown on whether this is possible and why your wife is the sole shareholder and you are the sole income earner.

The fourth is that you could leave your wife be the sole shareholder and she applies for MVL and BADR, then "gifts" you the money and you invest the cash in some easysaver or part fixed part easysaver and drain the cash bit by bit from there.

I am sure there are many other combinations!

As you can see, there are many possibilities and as there are so many variables and so many things that are not known, nobody can advise you here without knowing these. For example, what is your wife's tax position and what it will be in years to come. Also your age - if you are nearing state pension age and at that point you start to draw the salary from the company that is not trading, then you do not pay national insurance any more.

As others have said, you need a talk with an accountant and the starting point would be what is your financial end goal (for example, this could be "Having the monthly household income of xxx" and then this has to be looked at with taking into account all your (and your wife's) future income sources for the period you were planning to drain the company down and see what is the best strategy for both of you.

It does seem that your plan seem to be most costly to you.

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Replying to blox:
the sea otter
By memyself-eye
19th Jan 2024 11:02

Hmmm......That was a lot of free advice.

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Replying to memyself-eye:
RLI
By lionofludesch
19th Jan 2024 11:12

It was. I don't mind pointing folk in the right direction but there's no need to go on the journey with them.

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Replying to lionofludesch:
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By FactChecker
19th Jan 2024 13:52

Especially as adviser is unlikely to be starting from the same departure point - and hasn't been told where proposed journey's end is located!

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Replying to blox:
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By JazzJat
11th Feb 2024 09:57

Thank you for your kindness in sending me such a comprehensive reply.
A lot of people on here are asking why I don't ask my accountant. My accountant has been doing my acccounst for 20 years. He was asked but he is in his 70's and anything not quite straight forward, his eyes just glaze over. I don't really think he understood my question but said 'it was ok' just to get rid of me.

I would like to send you an Amazon Voucher for £20 to thank you, if that's ok with you?

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Replying to JazzJat:
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By I'msorryIhaven'taclue
11th Feb 2024 10:29

That'd be like tipping your hairdresser, who's just given you a top-notch haircut for free, 10 pence!

Go donate £200 to charity you tight-fisted old sob.

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Replying to JazzJat:
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By Leywood
11th Feb 2024 10:42

£20!!!

Are you having a laugh?!!!!

Cheeky sod

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Replying to Leywood:
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By I'msorryIhaven'taclue
11th Feb 2024 11:04

Yeah... and another thing, the reason your 70 year old accountant isn't biting when you broach the matter of your tax planning isn't because of his age, but because he doesn't want a £20 Amazon voucher.

For the record, the average age on this forum is quite close to 70!

Rant over! Now then, where's my slippers?

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