Planning For The Future
Times are hard for some contractors at the moment. As we’ve seen over the last year, fluctuations in oil price can have a significant impact on contractors with rotas being changed and rate cuts happening across the board.
If you have been contracting for a few years and paying yourself a low salary and taking additional monies out as dividends (the most efficient being £672 salary and £2,574 dividends per month for the 15/16 tax year) you should have built up some funds in the company which would have helped isolate you from the current low oil price. Thinking ahead to the future, if you decide to stop contracting and go back to a staff job how are you going to get the funds out of your company in the most tax efficient manner?
You want the funds ASAP
You have less than £25,000 in company funds
Statutory Instrument 2012/266, regulation 18 (replaces ESC C16) is what you’re after here. What this mouthful means is that company funds under £25,000 will be treated as something called a ‘capital distribution’ and therefore liable to Capital Gains tax. You are entitled to a £11,600 tax free allowance for CGT meaning you will need to pay a 10% tax on the value of funds taken after this before the money hits your bank account. Caution is advised here as £25,000 is an absolute limit and even if you go £1 over the entire amount is treated as dividend as opposed to a ‘capital distribution’ and you could be paying 25% tax instead of 10%.
You have more than £25,000 in company funds
You’re going to have to go down the formal liquidation route and appoint a liquidator which can cost up to £5,000. In the vast majority of cases this will entitle you to something called ‘Entrepreneur’s Relief’ which will again allow you to pay 10% tax on the total funds (after the £11,600 allowance) you want to take out of the company.
You have no immediate need for the funds
In that case you have a few different options which can be tax efficient:
It is common for contractors to involve their marriage partner in company by way of a shareholder and perhaps appoint them as a company secretary. If your spouse has little or no other income and you’ve decided to take a staff job then you can set your spouse up as a shareholder in the company and allow dividends (as mentioned in the first paragraph) and withdraw around £38,900 tax free from the company each year (figures will change slightly year on year).
Company pension contributions
The annual pension allowance stands at £40,000 for the 15/16 tax year so you (and/or your spouse) can invest up to this level each year to efficiently extract funds from your company. Contractors with a large sum can take advantage of something called ‘carry forward rules’ for previous tax years and invest up to £130,000 during 15/16! This can be done in conjunction with involving the spouse as a shareholder and having them withdraw tax free dividends also.