Tony and Mary each own 50 per cent shareholdings in two companies that they established 10 years ago, Ynot Ltd and Yram Ltd. Both have a financial year end of June 30 but there the similarity ends. Ynot has had another bad year as one of its major customers switched supplier. As a result, Ynot's pre-tax profits will be around £40,000. On the other hand, Yram has had a very good year and is likely to turn in pre-tax profits of an estimated £200,000.
Tony and Mary have decided that all Ynot's net profits will remain in the company this year and they will not receive any bonuses or dividends. Instead, they will focus on using £50,000 each of pre-tax profits from Yram for their own benefit. They are both concerned to build up funds for their retirement.
Tony and Mary are both higher-rate taxpayers in their mid-40s and members of Yram's small self-administered scheme. Based on their current remuneration and level of funding, single contributions could be justified this year of £20,000 for Tony and £25,000 for Mary. For every £1,000 increase in remuneration, Tony's annual SSAS contributions could be increased by £700 and Mary's could be increased by £650. They would like your advice on the following:
1: If they were each to use £50,000 of pre-tax profit to pay a dividend or bonus, how much would they receive after tax and National Insurance contributions? IR35 is not an issue.
2: Assuming they each use the full £50,000, what would be the optimum mix of bonus and dividend to produce the biggest net cash figure?
3: What are the relative advantages and disadvantages of making SSAS contributions rather than investing net cash personally?
4: If they wished to maximise their pension contributions, what would be the optimum mix of bonus, pension contribution and dividend?
5: What combination of bonus, dividend and pension contribution would you recommend and how would you justify it?