The Best Way to Extract Business Profit
e.g, £30,000 PROFIT - Dividend v Pension. We think pension is usually better than dividend now across all scenarios
£30000 Paid to You |
Dividend – paid out to you as net dividend |
Pension - £30000 Paid into Pension |
Corporation Tax Payable 20% |
£6,000 |
NIL |
Net Payment to you |
£24,000 |
£30,000 |
Employers National Insurance |
NIL |
NIL |
Employees National Insurance |
NIL |
NIL |
Money Now in Your Name Basic Rate Taxpayer (20%) |
£24,000 Dividend less £2,000 Tax Free Dividend Allowance £22,000 taxed at 7.5% = £1,650 Tax
In Your Pocket £24,000 less £1,650 Tax = £22,350 |
£30,000 in pension fund But if then use flexible drawdown £30,000 X 25% Tax Free Cash = £7,500 £22,500 X 20% Income Tax = £4,500 Tax. Net Left = £18,000
In Your Pocket £7,500 + £18,000 = £25,500 |
Money Now in Your Name Higher Rate Taxpayer (40%) |
£24,000 Dividend less £2,000 Tax Free Dividend Allowance £22,000 taxed at 32.5% = £7,150 Tax
In Your Pocket £24,000 less £7,150 Tax = £16,850 |
£30,000 in pension fund But if then use flexible drawdown £30,000 X 25% Tax Free Cash = £7,500 £22,500 X 40% Income Tax = £9,000 Tax. Net Left = £13,500 In Your Pocket £7,500 + £13,500 = £21,000 |
Money Now in Your Name Higher Rate Taxpayer (45%) |
£24,000 Dividend less £2,000 Tax Free Dividend Allowance £22,000 taxed at 38.1% = £8,382 Tax
In Your Pocket £24,000 less £8,382 Tax = £15,618 |
*£30,000 in pension fund But if then use flexible drawdown £30,000 X 25% Tax Free Cash = £7,500 £22,500 X 45% Income Tax = £10,125 Tax. Net Left = £12,375 In Your Pocket £7,500 + £12,375 = £19,875 |
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*May pay additional tax if Tapered Annual Allowance applies to Pension Contribution |
Tax on Death E.g. Basic Rate Tax Payer |
Inheritance Tax 40% = £22,350 X 40% = £8,940
Net Paid to Loved Ones £13,410 (more than half of starting £30,000 gone in tax) |
Untouched Pension Fund = £30,000 paid to loved ones
or Drawdown Pension Balance Death before Age 75 = NIL TAX Death After Age 75 = Loved ones pay tax when drawing pension fund at their rate of income tax Could be 100% of £30,000 never gets taxed |
Tax on Death E.g. Higher Rate Tax Payer |
Inheritance Tax 40% = £16,850 X 40% = £6,740
Net Paid to Loved Ones £10,110 (nearly 2/3rds of starting £30,000 gone in tax) |
Untouched Pension Fund = £30,000 paid to loved ones
or Drawdown Pension Balance Death before Age 75 = NIL TAX Death After Age 75 = Loved ones pay tax when drawing pension fund at their rate of income tax Could be 100% of £30,000 never gets taxed |
Tax on Death E.g. Additional Rate Tax Payer |
Inheritance Tax 40% = £15,618 X 40% = £6,247
Net Paid to Loved Ones £9,370 (more than 2/3rds of starting £30,000 gone in tax) |
Untouched Pension Fund = £30,000 paid to loved ones
or Drawdown Pension Balance Death before Age 75 = NIL TAX Death After Age 75 = Loved ones pay tax when drawing pension fund at their rate of income tax Could be 100% of £30,000 never gets taxed |
The above are very basic, low level calculation examples but we hope you get the 'gist'.
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