Quick Tax Calculation
Discussion
Ok, my sister has been offered a business opportunity worth around £50k. She is of the opinion that it would be better to use a Ltd company. If she went down this route, paid herself minimum salary and the rest in dividends what is the approx tax she would have to pay for both the company profits and divi tax (she is a lower rate tax payer at the moment).
I know that is a very brief overview but just looking for quick and dirty answers!
I know that is a very brief overview but just looking for quick and dirty answers!
No easy reply to that, I'm afraid.
Life has become very complicated due to recent changes made by Gordon Brown.
Small companies now pay tax at 19% on profits over £10,000. However, whether a company made a profit or not, if a company pays a dividend to its shareholders, the company has to pay 19% Corporation Tax on the value of the dividend. This rule came into effect on 1 April 2004.
On a pesonal level, provided you don't earn enough in the tax year from all sources to enter the higher rate tax bracket,, you will not pay ANY personal tax on dividend income and you will not be liable to any National Insurance contributions on that income either.
If you pay yourself a minimum salary up to the tax and NI limits, you will not have to deduct and pay over any PAYE or NI. However, not paying any NI may not be a good idea as it could have an impact on future state pension entitlements. This may or may not be an issue for you.
Paying yourself largely through dividends can also have an effect on personal pension contributions you may be paying or may wish to pay.
Finally, the administration of a company is always more expensive for a sole tradership of a similar size. Expect accounting fees at least double.
>> Edited by Eric Mc on Friday 29th July 17:29
Life has become very complicated due to recent changes made by Gordon Brown.
Small companies now pay tax at 19% on profits over £10,000. However, whether a company made a profit or not, if a company pays a dividend to its shareholders, the company has to pay 19% Corporation Tax on the value of the dividend. This rule came into effect on 1 April 2004.
On a pesonal level, provided you don't earn enough in the tax year from all sources to enter the higher rate tax bracket,, you will not pay ANY personal tax on dividend income and you will not be liable to any National Insurance contributions on that income either.
If you pay yourself a minimum salary up to the tax and NI limits, you will not have to deduct and pay over any PAYE or NI. However, not paying any NI may not be a good idea as it could have an impact on future state pension entitlements. This may or may not be an issue for you.
Paying yourself largely through dividends can also have an effect on personal pension contributions you may be paying or may wish to pay.
Finally, the administration of a company is always more expensive for a sole tradership of a similar size. Expect accounting fees at least double.
>> Edited by Eric Mc on Friday 29th July 17:29
It's a question I get asked fairly regularly so I have a rather "stock" set of answers.
Be wary of some of the advice that is out there, it is not always correct or up to date. Only this week a client of mine asked me the same question and showed me some comparative tax calculations performed by her Independent Financial Advisor. The calculations were incorrect in that he had not included the new tax rules on dividends - so, the bottom line query - which is more expensive, total tax and NI through a sole tradership or total tax and NI through a limited company?, was incorrectly answered.
Other issues which can have an effect on tax matters for companies are:
useage of personal cars - whether to include them as company cars and take the tax and NI Benefit in Kind hit or whether to leave the car outside the company and claim motoring costs on a pence per mile basis.
splitting of dividend income between husband and wife - whether desirable and whether it might fall foul of the Inland Revenue under Section 660a (the infamous Arctic Systems case).
Is the company vulnerable to IR35? Personal services companies (not what you are thinking
)need to be aware of this.
If I am drawing income through dividends, how frequently can I do this and how much can I pay myself?
All these factors need to be considered.
Be wary of some of the advice that is out there, it is not always correct or up to date. Only this week a client of mine asked me the same question and showed me some comparative tax calculations performed by her Independent Financial Advisor. The calculations were incorrect in that he had not included the new tax rules on dividends - so, the bottom line query - which is more expensive, total tax and NI through a sole tradership or total tax and NI through a limited company?, was incorrectly answered.
Other issues which can have an effect on tax matters for companies are:
useage of personal cars - whether to include them as company cars and take the tax and NI Benefit in Kind hit or whether to leave the car outside the company and claim motoring costs on a pence per mile basis.
splitting of dividend income between husband and wife - whether desirable and whether it might fall foul of the Inland Revenue under Section 660a (the infamous Arctic Systems case).
Is the company vulnerable to IR35? Personal services companies (not what you are thinking
)need to be aware of this. If I am drawing income through dividends, how frequently can I do this and how much can I pay myself?
All these factors need to be considered.
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