Thinking of closing your limited company down? Here are a few important things to remember in order to be tax efficient.
Should you have contracted for at least 2 years via your company and will stay out of limited company contracting for at least another 2 years after receiving the final monies from your company you will be in a strong position to claim the 10% entrepreneur’s tax relief rate.
If you are unsure whether or not you are going to stay out of limited company contracting for a period of at least 2 years it may be worth keeping your company open but non-trading/dormant while you make your decision.
Once you have made your decision to close down your limited company how you proceed to close it down will depend on how much distributable profit (after corporation tax and VAT have been accounted for) there is when trade ceases.
Should you have less than £25,000 remaining as reserves then the closure of your company is normally very straightforward and just requires the final submissions to HMRC, final business tax payments, final capital distributions transferred to shareholders of the company, and a DS01 form submitted to Companies House.
These remaining funds will be taxed at 0% up to £12,000 by claiming the annual exemption and any excess will be taxed at 10% by claiming entrepreneur’s relief on the capital gains pages of your self-assessment tax return provided that you meet all the conditions for this.
An interim capital distribution can be made prior to 6 April and a final distribution post 6 April in order to utilise two sets of tax-free £12,000 annual exemptions.
Should you be in the fortunate position whereby you have more than £25,000 of after-tax reserves in your company then you will generally require the services of a liquidator which generally costs around £1.5k – £1.8k should you use MVL Online.
In order to avoid the cost of liquidation, it may be worth taking some additional salary, dividends and/or making a pension contribution before you finish your contract in order to get your reserves figure below £25,000.
However, should you take an additional salary and dividends from your company before ceasing to trade it is worth noting that this may get taxed at 40% (salary) or 32.5% (dividends) or even more than 45% (should you cross the loss of child benefit or loss of personal allowance thresholds).
Therefore it is important to weigh up costs of liquidation, income tax, and capital gains tax before making any decisions and taking into account all sources of income in the tax year of liquidation (not just limited company-derived income).
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The above information is just for guidance purposes only and is not a substitute for professional advice and consulting the legislation.