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

[Jazz1966]

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.

 

[Scalloway]

I don't think there is any law to stop you. However there are two reasons why it may not be the best idea

1. It won't be a tax deductible expense for the company
2. Dividends may be more tax efficient

Can your company's accountant not help?

 

[pentel]

It might be worth looking at business asset disposal relief.

Business Asset Disposal Relief

Business Asset Disposal Relief (was known as Entrepreneurs' Relief) can reduce your Capital Gains Tax (CGT) when you sell certain business assets or shares - eligibility, deadlines, how to claim

www.gov.uk

This can apply when you liquidate a company via MVL

Liquidate your limited company

Compulsory and voluntary liquidation, the liquidation process, how liquidation affects company directors and the role of a liquidator

www.gov.uk

 

[Jazz1966]

I don't think there is any law to stop you. However there are two reasons why it may not be the best idea

1. It won't be a tax deductible expense for the company
2. Dividends may be more tax efficient

Can your company's accountant not help?

Thank you for your reply.
As its retained profit, the only tax should be PAYE.
The Company could just be closed down but I wanted to just take a salary over 10 years or so, running down the retained profit in the business.
My accountant reckons it was fine - but subsequently, other things I have read - especially on other forums - state that it is not a wise idea. I am just trying to get an idea as to why.

 

[DWS]

I think you would be hard pushed if challenged by HMRC to justify a £25k annual salary for a Director of a non trading Company, yes take a salary for your ongoing Director’s duties but £25k seems excessive, also it is the Directors responsibility to act in the best interest of the Company, in this case using up all the retained earnings would not seem to be doing so, they belong to the Company and the Shareholders not the Director.

 

[DWS]

I think you would be hard pushed if challenged by HMRC to justify a £25k annual salary for a Director of a non trading Company, yes take a salary for your ongoing Director’s duties but £25k seems excessive, also it is the Directors responsibility to act in the best interest of the Company, in this case using up all the retained earnings would not seem to be doing so, they belong to the Company and the Shareholders not the

But in saying that HMRC probably won’t mind at all as you will probably end up paying more in Income Tax and N/I

 

[MikeJ]

I assume you've topped up your pension as far as possible?

 

[Newchodge]

Thank you for your reply.
As its retained profit, the only tax should be PAYE.
The Company could just be closed down but I wanted to just take a salary over 10 years or so, running down the retained profit in the business.
My accountant reckons it was fine - but subsequently, other things I have read - especially on other forums - state that it is not a wise idea. I am just trying to get an idea as to why.

What about employer's NI (and employee's if you will be undr state pe4nsion age)?