Paying a salary from retained profits (non-trading)

[PennyHill]

I am the sole director of a Ltd Co which has not traded since 2019 and has around £90k of retained profit. The company hasn't been made dormant or been wound up/struck off, and I have been submitting annual returns on time each year.
I would now like to start taking a salary out of the retained profits - up to the NIC threshold - which would be my sole source of income (until the pensions start to kick in, anyway!).
Would there be any issues in taking a salary even though there is no new income coming in to the business?

 

[Gyumri]

I can't see how there can be any issue in the company paying you a salary - even if you are merely twiddling your thumbs.

 

[Baines Watson]

I am the sole director of a Ltd Co which has not traded since 2019 and has around £90k of retained profit. The company hasn't been made dormant or been wound up/struck off, and I have been submitting annual returns on time each year.
I would now like to start taking a salary out of the retained profits - up to the NIC threshold - which would be my sole source of income (until the pensions start to kick in, anyway!).
Would there be any issues in taking a salary even though there is no new income coming in to the business?

Have you thought about taking dividends instead if it is out of retained profits ? Might be a better strategy in your situation.

 

[ChrisCallaghan]

I am the sole director of a Ltd Co which has not traded since 2019 and has around £90k of retained profit. The company hasn't been made dormant or been wound up/struck off, and I have been submitting annual returns on time each year.
I would now like to start taking a salary out of the retained profits - up to the NIC threshold - which would be my sole source of income (until the pensions start to kick in, anyway!).
Would there be any issues in taking a salary even though there is no new income coming in to the business?

As a different idea, if you no longer need the company, you could consider closing the company via a Members Voluntary Liquidation, which will affect the distribution of the £90k out of the company to the shareholders (I assume yourself).

The below link explains the process in more detail:

What Is A Members Voluntary Liquidation (MVL)? | Wilson Field® - Licensed Insolvency Practitioners

A Members Voluntary Liquidation (MVL) closes a solvent UK company in a tax-efficient way and distributes cash to shareholders via Business Asset Disposal Relief

www.wilsonfield.co.uk

You may entitled to claim Business Asset Disposal Relief, currently set at 10%, however I would recommend seeking independent tax advice if you consider this option.

 

[PennyHill]

Have you thought about taking dividends instead if it is out of retained profits ? Might be a better strategy in your situation.

Thank you - I have considered that option too. My other dividends, although modest, do exceed the £500 tax-free limit so any dividends would attract basic rate tax (I'm not planning to drift into higher rate band next tax year). So perhaps a combined approach may work here (salary plus divi)

 

[PennyHill]

As a different idea, if you no longer need the company, you could consider closing the company via a Members Voluntary Liquidation, which will affect the distribution of the £90k out of the company to the shareholders (I assume yourself).

The below link explains the process in more detail:
[link removed]

You may entitled to claim Business Asset Disposal Relief, currently set at 10%, however I would recommend seeking independent tax advice if you consider this option.

Thank you. I did think about an MVL but was put off by the requirement to engage an IP. Plus I may wish to trade via this LtdCo vehicle in the next couple of years. I suppose I'm just trying to keep my options open!

 

[ChrisCallaghan]

Plus I may wish to trade via this LtdCo vehicle in the next couple of years

Then certainly sensible to discount MVL for now. Following going through an MVL, if you were to start again doing the same or similar, this would need to be declared to HMRC, and the tax benefits of the MVL would be essential undone. Below link for further reading should you need:

CTM36305 - Particular topics: company winding up TAAR: targeted anti-avoidance rule (TAAR) - HMRC internal manual - GOV.UK

www.gov.uk

 

[Paul Kelly ICHYB]

HMRC states:

Working out tax on dividends​

How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.

Tax band	Tax rate on dividends over the allowance
Basic rate	8.75%
Higher rate	33.75%
Additional rate	39.35%

To work out your tax band, add your total dividend income to your other income. You may pay tax at more than one rate.


How does that work? £20k Salary + £10k dividends = £30k, so you pay 20% on the £20k and 8.75% on the £10k? If £50k salary & £50k dividends = £100k, you pay 40% on the salary and 33.75 on the dividend?

 

[Baines Watson]

Thank you - I have considered that option too. My other dividends, although modest, do exceed the £500 tax-free limit so any dividends would attract basic rate tax (I'm not planning to drift into higher rate band next tax year). So perhaps a combined approach may work here (salary plus divi)

Basic rate tax for dividends is 8.75% vs the 20% on salaries so it may still be more tax efficient just to take dividends depending on how much you are planning to draw down and your other income.

Furthermore, you mentioned the company is non trading so you will be deducting salaries in the current accounting period of the company with no trading revenue coming in, plus you will have to register for payroll and do HMRC payroll submissions, I'm assuming since the company is non trading there is no current PAYE scheme in operation for the company.

Suggest to take professional advice from an accountant before making any decisions around this.

 

[Mario - TFA]

I wanted to clarify something. Retained earnings are simply an accounting figure that reflect the accumulated profits over time. Does the company have sufficient cash available to actually distribute to shareholders? Where have the funds come from if the company hasn't traded for the last 4 years?

 

[PennyHill]

I wanted to clarify something. Retained earnings are simply an accounting figure that reflect the accumulated profits over time. Does the company have sufficient cash available to actually distribute to shareholders? Where have the funds come from if the company hasn't traded for the last 4 years?

Hi - these are accumulated profits from the preceding 10 years' trading. Currently cash sitting in a (business) bank account, for a rainy day

 

[MikeJ]

May be worth putting the money into a pension too - something else to ask an accountant and/or an IFA.

(not sure how that sits in a non trading company, so ask that too...)

 

[MikeJ]

By the way, I loved your show in the 70s (sorry, you must get that a lot, if that's your real name)

Edit - Oh I've just checked and it isn't. That's a shame.

 

[PennyHill]

By the way, I loved your show in the 70s (sorry, you must get that a lot, if that's your real name)

Edit - Oh I've just checked and it isn't. That's a shame.

It's my alter-ego! Actually it's the name of a very nice spa hotel in Surrey where the England rugby team train

 

[GriffithAccts]

I am the sole director of a Ltd Co which has not traded since 2019 and has around £90k of retained profit. The company hasn't been made dormant or been wound up/struck off, and I have been submitting annual returns on time each year.
I would now like to start taking a salary out of the retained profits - up to the NIC threshold - which would be my sole source of income (until the pensions start to kick in, anyway!).
Would there be any issues in taking a salary even though there is no new income coming in to the business?

Hi Penny Hill,

With retained earnings, maybe it is more tax beneficial to tax a dividend especially if you are already earning salary / PAYE from another source. Of course, if you are not, then this is also doable, plus also a dividend might be a good way to extract retained earning regardless of the current year P&L according to the CA 2006.

Best,

Daniel

 

[Daybooks]

As a different idea, if you no longer need the company, you could consider closing the company via a Members Voluntary Liquidation, which will affect the distribution of the £90k out of the company to the shareholders (I assume yourself).

The below link explains the process in more detail:

What Is A Members Voluntary Liquidation (MVL)? | Wilson Field® - Licensed Insolvency Practitioners

A Members Voluntary Liquidation (MVL) closes a solvent UK company in a tax-efficient way and distributes cash to shareholders via Business Asset Disposal Relief

www.wilsonfield.co.uk

You may entitled to claim Business Asset Disposal Relief, currently set at 10%, however I would recommend seeking independent tax advice if you consider this option.

Worth bearing in mind that the clock is ticking towards 30th October, 2024 when things may change significantly.