Winding up your company? What is the most tax efficient way to do so?

If your business life cycle has come to an end or perhaps you are retiring you may decide to wind up your company. Our latest article looks at steps you can take to increase tax efficiency.

Closing down your limited company

Shareholders of a solvent company can choose to wind it up at any time and distribute its assets between themselves. This is known as a members’ voluntary liquidation (MVL). You can download our guide our guide on MVLs HERE. Amongst the benefits of an MVL is usually a lower tax bill as profits are distributed as capital rather than income. In addition to this there may be scope to further reduce the tax bill.

Can we make tax free payments before the closure?

An owner-managed company can make tax and NI-free payments to director/shareholders before any winding up distributions are made. This can be a more tax-efficient option than paying CGT even at the lower rates. Termination payments of up to £30,000 aren’t liable to tax or NI, except where they relate to a notice period. Since 6 April 2018 payment in lieu of notice (PILON) which is taxable and liable to NI as earnings from employment.

Redundancy Pay

Employees made redundant only pat tax on payments over £30,000. There are qualifying conditions to be met to be paid statutory redundancy pay. Directors who are also controlling shareholders are not entitled to such statutory payments, unless they were forced into the winding up, typically to prevent insolvent company from trading. They will also need to have an employment contract to be entitled.

The good news is that the £30,000 exemption applies to other payments which aren’t statutory redundancy payments. Amounts paid by a company relating to termination of employment contracts will also qualify for the exemption. It is imperative that the director has a contractual right to being paid by the company.

Contractual pay-offs

Whereas statutory redundancy payments have a formula to calculate them, there’s no such method to ascertain how much a director/shareholder can be paid. We believe the payment should represent a reasonable compensation for the loss of the director’s salary and benefits. Factors such as the current rate of salary and length of service should be used in deciding a suitable amount. Contact Us to find out more about this.  

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.