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bigduckontax
bigduckontax, Accountant
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I am moving from contractor to permanent on 1st November. The

Customer Question

I am moving from contractor to permanent on 1st November. The move puts me well above the 40% tax bracket.
I currently have a company set up where I am the director, shareholder and employee.
I pay myself minimum wage and dividends up to the 40% threshold. So up to 1 November I have paid 7 months salary and 2 dividends (paid quarterly).
I am probably going to go with the option of liquidating the company to remove the assets (cash only) and benefiting from the 10% entrepreneurial gain. I actually don't think there is another option?
But I am not sure how the minimum wage, dividends, new salary plus entrepreneurial gain will all impact my personal tax for the year?
And my guess would be that it would be beneficial, if there was a way to inject money back into the company to negate the dividend payments for the year, and instead take them out as part of the entrepreneurial gain, taxed at 10%.
Thoughts?
Thanks!
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
I can see the logic and the attraction in your proposal, but I do not think it will work. Accounting Web has the following observation on the matter:
'In answer to the OP, I don't think you can reverse it - as long as it was a legitimately declared dividend then it stands. However, I do recall reading that if an interim dividend was genuinely declared, and then at the year end, there aren't the reserves to pay it, the finalised dividend can be of a lower amount (that the company does have reserves to pay)'
So it all falls back on the type of dividend and also the financial state of the company itself. Were it an interim the company simply stops paying any more and, were it incorrectly declared, say in an unauthorised manner, then it could be withdrawn.
You are, of course, using two personal tax regimes which affect you, Income and Capital Gains. the 10% Entrepreneur's Relief (ER) applies to the gain on company liquidation whilst the dividend forms part of the your income. There will be the company's Corporation Tax (CT) position to take into account also on dissolution as dividends, as opposed to salaries, are not allowable against the profits liable to CT.
You will have quite a bit of work to do with a wet towel round yur head and the backs of lots of envelopes to work out all the options to reach the most economic solution from your viewpoint. Instead of liquidation the company, you could consider selling it off 'clean' as a going concern; you can even do this on eBay! It saves an awful lot of hassle and the gain made on the sale would attract the same ER as your liquidation method.
I do hope I have thrown some light on your suggestions.
Customer: replied 2 years ago.

Thanks Keith.

You mention selling it off as 'clean'. Do you mean someone would buy it to the value of the cash in it? It has quite a substantial amount of cash in it. In your experience why would someone buy it with money already in it?

Thanks!

Expert:  bigduckontax replied 2 years ago.
That is one way of doing it, but by 'clean' I actually meant clearing the cash balance down to a modest amount before selling. I submit that my suggestion has more chance of a quick sale, after all why should the buyer want the hassle of paying a big premium to get his own cash back! Especially when there are other cheaper bargains available on eBay, for example.
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