Should you take dividends now or wait until you retire?

The quick answer

The quick answer to this is you should wait if you can afford to. Money taken out as capital is taxed at usually only 10% whilst dividends can be tax to up to 38.1%.

Too much cash held?

Some business owners worry they are holding ‘too much’ cash in their company and that HM Revenue and Customs may try and challenge their trading status (as they are holding excess funds) and try and reclassify them as an investment company. However, there is a 20% rule in that as long no more than 20% of the companies income comes from the investment funds (and they are unlikely to at current bank paying interest rates) then they are still classified as a trading company.

Some Further Detail

If you compare the two choices of taking money out you have:

Plan A

Dividends are taxed as income at varying rates as follows:
First £2,000 – tax free
Basic rate tax payer – 7.5%
Higher rate tax payer – 32.5%
Additional rate tax payer – 38.1% – this is for those earning £150,000 per annum.

Plan B

On sale of a company shares or on a Members Voluntary Liquidation (this is an asset rich tax efficient liquidation process) the first £10 million of capital of a trading company is taxed at just 10%.

The conclusion then is that the nearer the company is to then end of its time (and it is profitable) the more that can be left in the company the better.

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David Kirk

David qualified as a Chartered Accountant in 1990 and Licensed Insolvency Practitioner in 1996. David will give you clear and plain language advice about your business’s options and make a recommendation of which route he thinks will work best for you.

Email: david@kirkhills.co.uk | Call: 01392 474 303