Corporation Tax Question

[Rough Outline]

1. Is it allowed to adjust your salary so your profits are approximately £0 and you avoid paying huge amounts of corporation tax and only have to pay PI tax?

2. Can dividends be taken out before corporation tax?

 

[Ola1]

Yes you can take all a companies profit out as salary if you are authorized to do so, but that might not be a good idea

Companies Act requires that dividends be drawn out of distributable profits , normally profit after corporation tax, and other mandatory non distributable amounts

 

[Deleted member 162294]

Yes you can take out dividends before corporation tax. Example your corportion tax is due soon and you have £1000 profit, you can take out 80% of that as a dividend and leave the rest to be taxed.

 

[Ola1]

Apologies for the Bluntness , but the quote below is completely wrong .

Yes you can take out dividends before corporation tax. Example your corportion tax is due soon and you have £1000 profit, you can take out 80% of that as a dividend and leave the rest to be taxed.

 

[Deleted member 162294]

Apologies for the Bluntness , but the quote below is completely wrong and would lead to serious trouble

What?!? how?

 

[SBlundell]

What?!? how?

Companies Act requires that dividends be drawn out of distributable profits , normally profit after corporation tax, and other mandatory non distributable amounts

Rough Outline - Fincley's already answered your question - you can draw all profits as salary (effectively minimising the company's corporation tax liability) but it's usually not the most tax efficient way of doing so (given that broadly personal tax on the salary starts at 20% then 40% + employee's national insurance at 12% then 2% compared to the company's ~20% corporate tax rate).

Dividends are drawn out of 'retained profits' i.e. after tax. But they do attract a much lower personal tax rate.

 

[MyAccountantOnline]

1. Is it allowed to adjust your salary so your profits are approximately £0 and you avoid paying huge amounts of corporation tax and only have to pay PI tax?

Yes you can pay any salary you wish, but, why would you want to?

Generally for most people the big saving with trading via a limited company is National Insurance. If you pay a large salary you may avoid Corporation tax but will end up paying more Income tax and National Insurance.

2. Can dividends be taken out before corporation tax?

No

 

[Deleted member 162294]

Ok, my understanding hasn't changed then. I just failed to provide the circumstantial information in my example.

Its also worth mentioning you don't pay NI contributions on dividends and even dividends are subject to tax depending on which income tax band you're currently on.

Correct me if I'm wrong, in terms of tax efficiency the point at which you stop paying yourself a salary and start paying in dividends should be when your total amount of 'take home' money drops below 80%; this is while you are still on 20% income tax because taxable income is the amount you earn after your personal allowance.

Then there will come a point where its better to start paying yourself a salary again once when you reach 40% income tax. From my calculations based its no longer efficient to pay yourself in dividends after 40% income tax.

 

[Tom McClelland]

Then there will come a point where its better to start paying yourself a salary again once when you reach 40% income tax. From my calculations based its no longer efficient to pay yourself in dividends after 40% income tax.

That isn't my understanding. I think it is more efficient to extract profit via dividends all the way up, because of the saving of employers NI contributions, which would only be offset by 1/5 by corporation tax reduction. The dividend tax rates seem to be set so that PAYE and dividends are neutral, but employers NI applies to PAYE payments.

I'd be very grateful if it were pointed out that I'm wrong...

 

[Walkol]

Ok, my understanding hasn't changed then. I just failed to provide the circumstantial information in my example.

Its also worth mentioning you don't pay NI contributions on dividends and even dividends are subject to tax depending on which income tax band you're currently on.

Correct me if I'm wrong, in terms of tax efficiency the point at which you stop paying yourself a salary and start paying in dividends should be when your total amount of 'take home' money drops below 80%; this is while you are still on 20% income tax because taxable income is the amount you earn after your personal allowance.

Then there will come a point where its better to start paying yourself a salary again once when you reach 40% income tax. From my calculations based its no longer efficient to pay yourself in dividends after 40% income tax.

I hope you are not an accountant, or advising anyone on tax matters.

 

[Deleted member 162294]

I hope you are not an accountant, or advising anyone on tax matters.

AND WHAT IF I AM!?!?!

 

[Rough Outline]

Is this correct?

Company Profit - £50,000
After Corp. Tax - £40,000

£40,000 is then paid to be me as a dividend...

After Personal Allowance - £31,895
After Dividend Tax - £28,705.5

 

[MyAccountantOnline]

Is this correct?

Company Profit - £50,000
After Corp. Tax - £40,000

£40,000 is then paid to be me as a dividend...

After Personal Allowance - £31,895
After Dividend Tax - £28,705.5

Assuming its one small company with £50,000 taxable profits Corporation tax will be £10,000 leaving £40,000 which can be paid as a dividend.

Your personal tax will depend on your circumstances.

Did you include in the company accounts any salary payable to you?

 

[Rough Outline]

Assuming its one small company with £50,000 taxable profits Corporation tax will be £10,000 leaving £40,000 which can be paid as a dividend.

Your personal tax will depend on your circumstances.

Did you include in the company accounts any salary payable to you?

This is purely hypothetical so I haven't factored in any salary, should I?

Also, have I correctly calculated the tax I have pay on the dividend?

 

[Anna Chandley]

Is this correct?

Company Profit - £50,000
After Corp. Tax - £40,000

£40,000 is then paid to be me as a dividend...

After Personal Allowance - £31,895
After Dividend Tax - £28,705.5

Assuming that you have no other income and have a standard personal allowance then for 2013/14

Your gross dividend income is £44,444.45 (40,000 *100/90)

Less PA of £9,440 leaves £35,004.44 of which £32,010 falls in the basic rate tax band leaving £2,994.45 to be taxed at the higher rate.

Higher rate tax would be £2994.45 x 32.5% less 10% tax credit = £673 tax payable


Anna

 

[Anna Chandley]

That isn't my understanding. I think it is more efficient to extract profit via dividends all the way up, because of the saving of employers NI contributions, which would only be offset by 1/5 by corporation tax reduction. The dividend tax rates seem to be set so that PAYE and dividends are neutral, but employers NI applies to PAYE payments.

I'd be very grateful if it were pointed out that I'm wrong...

You are correct Tom.


If you have £10,000 of net dividends falling in the 40% band the individual will pay £2,500 in income tax and the company will have paid £2,500 corporation tax on the £12,500 pre tax profits that allowed the dividend payment. (assuming 20& CT rate)

If the £12,500 were paid as salary then the income tax payable would be £5,000 with no corporation tax paid.

The total income/corporation tax payable is the same in both circumstances but the dividend saves on national insurance.

Anna