How to close your company and extract the profits at 10%

All things come to an end eventually and contracting is no exception.  Whether it was your decision or not, you might eventually decide to close down your company and move on to new projects.

If you have been contracting for a while, you may find that you have surplus reserves left in the company.

In this scenario, you want to be able to take the money out in the most tax efficient way possible.  However, the amount of reserves left in the company will dictate how you withdraw the money as each method will result in different results.  There are normally three options:

Taking reserves as a dividend

Taking reserves as a dividend may seem like an obvious solution but you need to consider dividend tax and the amount you have already taken so far in the tax year.

Reserves of £25,000 or less

If you have under £25,000 reserves left in the company, after all bills and taxes, you can withdraw the funds as a capital distribution and pay capital gains tax.

Reserves of £25,000 or over

If you want to distribute more than £25,000, you have two choices:

  1. Withdraw funds (as a dividend) until there is £25,000 reserves left then withdraw the remaining amount as a capital gain.
  2. Start a Members Voluntary Liquidation (MVL) with a liquidator.
What is an MVL?

An MVL can be a very advantageous way to withdraw reserves from the company as it allows the remaining reserves to be treated as a capital gains distribution.  Furthermore, if you own more than 5% of the company you can opt for Entrepreneurs relief to be applied which effectively reduces the overall tax rate to 10%.

However, because there is a fee to carry out an MVL – you must engage an Insolvency Practitioner to carry out the procedure, it is generally advised that you should only consider this option if reserves are in excess of £35,000.

By applying a 10% tax rate across all the company reserves, as opposed to withdrawing dividends, can result in a significant saving in tax.  Although there are lots of things to consider, including your personal circumstances and the liquidator’s fees, this method is certainly an option to take seriously when you have high reserves.

What to do if you are closing your company

Once you have decided to close the company down, speak with us about your options.  Your accountant will be able to review your personal circumstances and advise you on the best course of action.  If an MVL is right for you, they’ll be able to start the process with our Insolvency Practitioner partner straight away.

Posted by Chris Mollan