Video looks at pensions as the best way to extract profits from your business rather than dividends. Less tax, more money, less or nil inheritance tax too. Pension v dividends.
“Hello there. Dividends versus pensions.
Many business owners, including myself, we have that debate if we’ve made profits, of how we going to pay ourselves. We pay ourselves a salary and then do we declare dividends or do we declare, do we paid into pension funds? [And] I just want to give you this and do some numbers here just some examples:
So let's say you’ve got £30,000 that you want to strip out of your business.
If you use the dividend route: a dividend is technically a distribution of profits after tax, so let's say you've made a gross profit of £30,000. If you leave the money inside your business because you want to declare a dividend, that same real profit of £30,000. It means your business, even as a small business will pay corporation tax of 20%. So your £30,000 goes down to £24,000.
On the other side if you paid it directly into a pension fund, £30,000 would be immediately offset as an expense, so £30,000 profit paid into your pension fund there is now no profit and it's inside your pension fund. No employers national insurance liability, no benefiting kind tax or anything like that.
So two options, just to start with just hold it there, leave it in the business pay the corporation tax then distribute as dividend or pay into pension.
If you leave it in the business e.g. £30,000 after corporation tax that’s £24,000 left to pay out to you or £30,000 in new pension. So it’s £24,000 versus £30,000 in pension. Hold that thought.
Okay, so when you then come to raw it is dividend £24,000 effectively is deemed as, a as a paid as a dividend to you, with a tax credit of 10%. So dividing it by 0.9, and I’ve done these figures in an article for you, which I’ll give you the link to.
But £24,000 is deemed [xxx as a net xxx] as a gross dividend sorry, for your self-assessment return of £26,666. If you are a basic rate taxpayer = no further tax to pay but if you're a higher rate taxpayer there is a further tax to pay of 22.5%. So you would actually pay just short of £6000 in income tax as well. So that would, your £24,000 then goes down to £18,000.
If you are additional rate taxpayer, as in a ‘superduper’ earner, then tax to pay there would be an additional 27.5%. So that's a real tax bill £24,000 minus further tax to pay of £7,333 leaving you £16,667.
Compare that to pension fund, where it's inside your pension fund tax free, you can then draw down 25% as a tax-free lump sum and the balance of the income can be drawn down when you need it, from age 55, and you can control from an income perspective and a tax perspective when you draw it down.
Moving that on, from a death perspective, let's say, and I'll just give you one example, let's say you paid the dividend and you're a basic rate taxpayer £30,000 is now £24,000 that I've got in the bank and then I die. Potentially from an inheritance tax perspective, let's say that was taxed at 40% well that's a further tax bill of £9,600. So what you’ve paid from your £30,000 just on death now, I’m not talking about income but on death is £30,000 gross dividend or profit, then you pay corporation tax of £6,000 down to £24,000 and then even moving on, ignoring higher rate and additional rate taxpayers, for a basic rate taxpayer, if there was inheritance tax to pay that’s a further £9600, total tax bill on that £30,000 was £14,400. You've lost nearly half of your money.
Compare that Mr Business Owner, Mr Company Director, compare that to pension. You paid £30,000 across, instantly save £6,000 in corporation tax.
The £30,000 in your pension fund, if you pass away and you haven't taken any benefits, no tax to pay can be left to your loved ones inheritance tax free. What if you started to take out some of your pension benefit? You may have released tax-free lump sum, you may have started to draw down some income from your pension fund under the new flexible pensions rules.
If you die before age 75 and you have drawn down some money from your pension fund still no tax to pay. [And] even if you’ve died after age 75 and you've started to draw down (so if you haven't touched it, you've died after a 75 no tax) but if you have started to take money out of your pension and you've passed away after age 75, your loved ones, well once the new rules start to take over, they will just pay their own usual income tax rates.
So as far as I'm concerned here, it’s just a very quick worked example for you, where I’ve used it on £30,000, I again think pension fund is much more tax efficient for the business owner to strip additional money out of your business without incurring a tax liability because if you start drawing as dividend,
• you've left it in the business initially say you got to pay corporation tax on it
• then you start taking it as a dividend
• if you are a higher and a higher rate taxpayer et cetera you can pay more tax
• then you may get pinged for some form of inheritance tax on death
Compared to pension fund:
• no corporation tax
• it's written off against your corporation tax bill so it's a true in that example £30,000 got your pension fund
• then if you die early no tax to pay and
• if you die after age 75 you only then start paying some tax on it if you've already started to take some money out of the pension fund yourself
Now I've written quite a big article with all of the numbers on this and put a link in to that page on this particular video page, so have a read, have a watch, watch this again and talk to me about: if you're a small business owner rethinking: “right my how can I extract additional money out of my company without incurring tax liability but then also presenting much more flexible tax opportunities for me, not just today, but later on in life” and not just for you in later life, in terms of retirement, but also in the form of death benefits for your loved ones. Thanks very much for watching.”