Using a Ltd Company to give yourself a tax-free pension!
Question I am accumulating and retaining profits in my limited company. Once in retirement (say 15 years time) is it possible to draw dividends on those retained profits, but which were made many years earlier ?
Under current legislation, it is perfectly possible to draw dividends many years after the profits were earned.
This is because dividends are a payment to the shareholders out of retained profits.
The retained profit of a company is the amount left in the company after the payment of any corporation tax due.
It does not matter whether the profit was made this year or twenty years ago. What matters is whether the company can afford to pay the dividend and whether it has sufficient distributable reserves (effectively the same as retained profits for this purpose).
Generally speaking, it is illegal for a company to declare a dividend where there are no retained profits from which to pay the dividend.
Under current legislation, there is no tax liability on the shareholder if a dividend does not push them into the higher rate tax bands.
In fact, if you can afford to keep the profits in the company, then you can earn yourself a significant tax-free income when you retire!
Alex has built up a portfolio of 10 properties within his company 'Properties for Income Ltd' over a 15 year period.
Alex had no need to extract any of the profits from the company as he also had a well paid job.
When he decides to retire, the company has accumulated retained profits of £300,000.
Alex can start to extract around £30,000 per annum without having to pay a single penny in income tax.
As you can see, this gives him quite a nice tax-free pension fund!
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