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Withdrawing cash from a company

Taking it out as interest income on DLA in credit vs taking out a dividend

Client wants to take some extra cash out from the company. He's within the basice rate tax band.

Option 1  - charge interest on his DLA which is substantially in credit and recieve a £1,000 savings allowance with the residual being taxed at 20%, but the company receives a deduction for the gross payment. You also have to file a CT61.

Option 2 - take out a dividend and pay tax at 7.5% on it, but will also have incurred corporation tax before this (say at 20%). However this also reduces retained earnings so reduces the tax burden when you close the company (it hold property so no ER).

I know you'll probably say run through the numbers, but is there a preferred option (1 or 2)?

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18th Oct 2018 16:54

I would immediately raise 2 points.

Point 1: The best option depends on information you haven't given us.

Point 2: Your client is paying 5.26% more Corporation Tax than they should and this represents a tax saving opportunity you may have overlooked.

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to Duggimon
18th Oct 2018 18:50

Your right so here's more info. He's in the BR Tax Band.

The payment is £4,000 (commercial rate of interest).
The company deducts 20% and pays this to HMRC (£800) but saves CT at 19% on the £4k = £760. So the net cost to the company is £40.

He then includes the gross £4k on his personal tax return (after £1k sav allow) only £3k is taxed at 20% = £600, but he receives the credit of £800. He has other taxable income, so this whole thing saves him £200 (which is the 20% on his savings allowance).

So it saves him £200, but costs the company £40, bringing the net saving to £160.

I hope the above logic is sound? Could you expand on point 2? How do you arrive at 5.26%? Thanks

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to Nicks9991
18th Oct 2018 18:52

Nicks9991 wrote:

Could you expand on point 2? How do you arrive at 5.26%? Thanks

1%/19%
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18th Oct 2018 18:01

I will indeed say run through the numbers but there's a good chance that option 1 will be the better one if the withdrawal is a modest one and the shareholder stays within the basic rate.

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18th Oct 2018 18:13

Interest is likely the cheapest overall, but to be able to take any decent amount in interest, there would have to be a pretty huge credit balance on DLA, as remember that a 'commercial' rate of interest should be used. If an excessive interest rate is used, the 'interest' could be challenged on the basis that it is in fact earnings.

Furthermore, if the loan is substantial and is sat in the company's bank account, it could be argued that the funds are not used for the purpose of the company's trade, thus denying CT relief. I'm not saying that is the case here, but it's worth considering.

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By Matrix
18th Oct 2018 19:36

He could charge rent for use of home office or transfer shares to a spouse.

Surely the additional 7.5% saved will be used up by your fees in doing this modest planning and then filing CT61s?

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to Matrix
19th Oct 2018 09:35

Matrix wrote:

He could charge rent for use of home office or transfer shares to a spouse.

Surely the additional 7.5% saved will be used up by your fees in doing this modest planning and then filing CT61s?

Yes, indeed.

This is small beer.

Don't spend too much time thinking about it.

One more thought - is this a one-off withdrawal ? If so, I'd question how this squares with the concept of interest, which I'd expect to be paid throughout the term of the loan.

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