If you are considering closing down the company you have used for contracting for whatever reason, Muhammad Dar, a personal accountant at ClearSky Contractor Accounting, gives some advice on how to extract any remaining profits tax-efficiently.
“In most cases, the most beneficial way of distributing final funds on company closure is via capital distribution, which is classified as a Capital Gain rather than income.
“However, this restricts the total amount that can be taken as a capital distribution without going through a formal liquidation procedure (and with the associated cost) to £25,000.
“The benefit here is that each individual has an annual exemption to Capital Gains Tax (CGT) of £3,000 (for 2024/25), with anything above this likely to be taxed at only 10% if Entrepreneurs Relief (ER) is due.
“A number of criteria must be met before ER can be claimed, though, so it’s advisable to seek expert advice before making a decision to close the company.
“Entrepreneurs’ Relief may apply to any remaining company profits if you close your company down. However, a number of conditions need to be met. For example, you must have held the shares for at least 12 months prior to the disposal.
“Fortunately, the lifetime limit for claims under the ER regime was raised to a healthy £10m* from April 2011, which should be more than adequate for most contractors’ needs.”
