Partnership tax advantages?
Discussion
What are the benefits of having a partnership over a limited company on a medium sized business?
As far as I can tell it is the trade off between avoiding corporation tax at the expense of paying full earnings tax at year end regardless of whether you have the cash as such.
That said, I am sure the above is nonsense.
As an aside, someone on another forum claimed that you could run any car as a mere expense through a partnership ergo it was cost efficient to have a high polluting valuable car through the company. Is this true?
As far as I can tell it is the trade off between avoiding corporation tax at the expense of paying full earnings tax at year end regardless of whether you have the cash as such.
That said, I am sure the above is nonsense.
As an aside, someone on another forum claimed that you could run any car as a mere expense through a partnership ergo it was cost efficient to have a high polluting valuable car through the company. Is this true?
Rather patronising there Eric.
I wouldnt consider that (hence the 'as an aside') remark.
I have long wondered what the point of having a limited comany is though.
Most borrowings have associated personal guarantees thus the limited liability side of things is largely irrelevant hence my curiosity as to tax breaks.
I wouldnt consider that (hence the 'as an aside') remark.
I have long wondered what the point of having a limited comany is though.
Most borrowings have associated personal guarantees thus the limited liability side of things is largely irrelevant hence my curiosity as to tax breaks.
Sorry if it cam across that way.
As you are not a client I have no idea what business experience you already have so assumed you were asking the question as a "beginner"!
The main advantage of being limited is still "limited liability. However, for non-limited operations exposure to risk can be safeguarded against by ensuring adequate insurance cover is procured.
Indeed, many limited companies partially lose limited liability status if directors sign personal guarantees to borrowings or use their personal assets as collateral.
On rare occasions (fraud, wrongful trading etc) limited liability may not apply to directors. This is known as "lifting the veil of incorporation" but hardly ever happens in reality.
The advantages of non-limited trading are mainly non-tax based. Accounts are simpler (by and large) and therefore accounting fees tend to be lower.
There is also less government beaurocracy to deal with. If the only people involved in the business are the proprietors, then a PAYE scheme does not have to be set up and the minefield iof PAYE Benefits in Kind are not relevant. PAYE would still apply if there were employees, of course.
The tax disdvantage of partnerships/sole-traders over companies is that there is less scope for tax planning and you will, in all liklehood, pay more tax than a director/shareholder of a company of a similar size and income levels.
Obviously, limited companies generally do have to register for PAYE and BIK regulations do apply to the directors when they have the use of company owned assets.
As you are not a client I have no idea what business experience you already have so assumed you were asking the question as a "beginner"!
The main advantage of being limited is still "limited liability. However, for non-limited operations exposure to risk can be safeguarded against by ensuring adequate insurance cover is procured.
Indeed, many limited companies partially lose limited liability status if directors sign personal guarantees to borrowings or use their personal assets as collateral.
On rare occasions (fraud, wrongful trading etc) limited liability may not apply to directors. This is known as "lifting the veil of incorporation" but hardly ever happens in reality.
The advantages of non-limited trading are mainly non-tax based. Accounts are simpler (by and large) and therefore accounting fees tend to be lower.
There is also less government beaurocracy to deal with. If the only people involved in the business are the proprietors, then a PAYE scheme does not have to be set up and the minefield iof PAYE Benefits in Kind are not relevant. PAYE would still apply if there were employees, of course.
The tax disdvantage of partnerships/sole-traders over companies is that there is less scope for tax planning and you will, in all liklehood, pay more tax than a director/shareholder of a company of a similar size and income levels.
Obviously, limited companies generally do have to register for PAYE and BIK regulations do apply to the directors when they have the use of company owned assets.
Eric Mc said:
Sorry if it cam across that way.
As you are not a client I have no idea what business experience you already have so assumed you were asking the question as a "beginner"!
No worries As you are not a client I have no idea what business experience you already have so assumed you were asking the question as a "beginner"!
EricMc said:
The tax disdvantage of partnerships/sole-traders over companies is that there is less scope for tax planning and you will, in all liklehood, pay more tax than a director/shareholder of a company of a similar size and income levels.
.
Really?- thats the opposite to my preconceptions of it..
What is wrong with the following logic then:
Limited company: If you are making a greater profit than you draw as earnings then you in effect pay tax twice on that excess i.e corporation tax on the profit and subsequent dividend/paye tax if you want to take it at later stage
Partnership: any profit= earnings= self assessment tax?
I am obviously missing something here.
Edited by blindswelledrat on Tuesday 9th September 14:00
Corporation Tax is currently set at 21% for small companies (it is rising to 22% on 1 April 2009).
Companies pay this low rate of Corporation Tax on profits up to £300,000.
The basic rate of Income Tax for individuals is now 20% (reduced from 22%).
Individuals start paying 40% tax on income levels of around £40,000.
An individual running their own company will normally try to reduce the amount of personal income coming out of the company to at least a level that keeps them personally below the higher rate threshold for personal tax. Some may even want to only pay salaries that take them only up to the point where they start paying tax i.e. currently £6,035.
Dividend income is also taxed very favourably for individuals. If a person's income for a tax year is below the 40% threshold level, they effectively pay no Income Tax whatsoever on the dividends received. And dividends are not liable to National Insurance either.
The downside of dividends is that they are not an allowable deduction off the company profits when calculating the company's Corporation Tax liability.
However, many people are willing to accept this extra tax cost for the sake of not paying Income Tax at 40% and not having to pay any NI (Employee's or Employer's contributions) at all.
In a limited company, there is some scope for extracting income from the company tax free - but on a very limited basis (expense claims, claims for "Use of Home as Office" etc)
Companies pay this low rate of Corporation Tax on profits up to £300,000.
The basic rate of Income Tax for individuals is now 20% (reduced from 22%).
Individuals start paying 40% tax on income levels of around £40,000.
An individual running their own company will normally try to reduce the amount of personal income coming out of the company to at least a level that keeps them personally below the higher rate threshold for personal tax. Some may even want to only pay salaries that take them only up to the point where they start paying tax i.e. currently £6,035.
Dividend income is also taxed very favourably for individuals. If a person's income for a tax year is below the 40% threshold level, they effectively pay no Income Tax whatsoever on the dividends received. And dividends are not liable to National Insurance either.
The downside of dividends is that they are not an allowable deduction off the company profits when calculating the company's Corporation Tax liability.
However, many people are willing to accept this extra tax cost for the sake of not paying Income Tax at 40% and not having to pay any NI (Employee's or Employer's contributions) at all.
In a limited company, there is some scope for extracting income from the company tax free - but on a very limited basis (expense claims, claims for "Use of Home as Office" etc)
Eric Mc said:
Corporation Tax is currently set at 21% for small companies (it is rising to 22% on 1 April 2009).
Companies pay this low rate of Corporation Tax on profits up to £300,000.
The basic rate of Income Tax for individuals is now 20% (reduced from 22%).
Individuals start paying 40% tax on income levels of around £40,000.
An individual running their own company will normally try to reduce the amount of personal income coming out of the company to at least a level that keeps them personally below the higher rate threshold for personal tax. Some may even want to only pay salaries that take them only up to the point where they start paying tax i.e. currently £6,035.
Dividend income is also taxed very favourably for individuals. If a person's income for a tax year is below the 40% threshold level, they effectively pay no Income Tax whatsoever on the dividends received. And dividends are not liable to National Insurance either.
The downside of dividends is that they are not an allowable deduction off the company profits when calculating the company's Corporation Tax liability.
However, many people are willing to accept this extra tax cost for the sake of not paying Income Tax at 40% and not having to pay any NI (Employee's or Employer's contributions) at all.
In a limited company, there is some scope for extracting income from the company tax free - but on a very limited basis (expense claims, claims for "Use of Home as Office" etc)
I think the value of being under the 40% threshold is significant because it affects your savings rates etc too. Is there a threshold for dividends as well though?Companies pay this low rate of Corporation Tax on profits up to £300,000.
The basic rate of Income Tax for individuals is now 20% (reduced from 22%).
Individuals start paying 40% tax on income levels of around £40,000.
An individual running their own company will normally try to reduce the amount of personal income coming out of the company to at least a level that keeps them personally below the higher rate threshold for personal tax. Some may even want to only pay salaries that take them only up to the point where they start paying tax i.e. currently £6,035.
Dividend income is also taxed very favourably for individuals. If a person's income for a tax year is below the 40% threshold level, they effectively pay no Income Tax whatsoever on the dividends received. And dividends are not liable to National Insurance either.
The downside of dividends is that they are not an allowable deduction off the company profits when calculating the company's Corporation Tax liability.
However, many people are willing to accept this extra tax cost for the sake of not paying Income Tax at 40% and not having to pay any NI (Employee's or Employer's contributions) at all.
In a limited company, there is some scope for extracting income from the company tax free - but on a very limited basis (expense claims, claims for "Use of Home as Office" etc)
No, for 2008/09 the 40% threshold is reached when your personal income from all sources for the tax year comes to £41,435.
A number of points need to be made:
The dividend value used in arriving at your total income for the year is the Gross Dividend. Although no real tax is deducted at source on dividends, dividends are DEEMED to have suffered a notional tax deduction of 10%. So, if you gave yourself a dividend payment of £40,000, it would be DEEMED to be a Gross Dividend of £44.444. Therefore, some of your dividend income would creep over into the higher rate tax bracket.
The really odd thing is that Higher Rate Tax on dividends is not actually 40%, but 32.5%.
A number of points need to be made:
The dividend value used in arriving at your total income for the year is the Gross Dividend. Although no real tax is deducted at source on dividends, dividends are DEEMED to have suffered a notional tax deduction of 10%. So, if you gave yourself a dividend payment of £40,000, it would be DEEMED to be a Gross Dividend of £44.444. Therefore, some of your dividend income would creep over into the higher rate tax bracket.
The really odd thing is that Higher Rate Tax on dividends is not actually 40%, but 32.5%.
Edited by Eric Mc on Tuesday 9th September 14:44
Eric Mc said:
No, for 2008/09 the 40% threshold is reached when your personal income from all sources for the tax year comes to £41,435.
A number of points need to be made:
The dividend value used in arriving at your total income for the year is the Gross Dividend. Although no real tax is deducted at source on dividends, dividends are DEEMED to have suffered a notional tax deduction of 10%. So, if you gave yourself a dividend payment of £40,000, it would be DEEMED to be a Gross Dividend of £44.444. Therefore, some of your dividend income would creep over into the higher rate tax bracket.
The really odd thing is that Higher Rate Tax on dividends is not actually 40%, but 32.5%.
Is there a good reason for that? Or just to confuse...A number of points need to be made:
The dividend value used in arriving at your total income for the year is the Gross Dividend. Although no real tax is deducted at source on dividends, dividends are DEEMED to have suffered a notional tax deduction of 10%. So, if you gave yourself a dividend payment of £40,000, it would be DEEMED to be a Gross Dividend of £44.444. Therefore, some of your dividend income would creep over into the higher rate tax bracket.
The really odd thing is that Higher Rate Tax on dividends is not actually 40%, but 32.5%.
Edited by Eric Mc on Tuesday 9th September 14:44
So by my calculations, if a director paid himself a salary of £6,035/year, then the maximum dividends he could receive to remain under the threshold would be £31,860 (ish), is that correct?
Eric is it therefore beneficial, say if someone is moving from the lower band potentially into the higher band, to take less dividends at first so as to remain in the lower band and possibly just leave it in the co. until it is needed?
As a side note, I think that I may be in a good position because my year end is July so I could actually pay myself a salary of £12,070/year tax-free?
Seany88 said:
[...
So by my calculations, if a director paid himself a salary of £6,035/year, then the maximum dividends he could receive to remain under the threshold would be £31,860 (ish), is that correct?
Eric is it therefore beneficial, say if someone is moving from the lower band potentially into the higher band, to take less dividends at first so as to remain in the lower band and possibly just leave it in the co. until it is needed?
I think you are missing the point there. It means that the first 35k of dividends is pretty much tax free and anything over that is 30% as opposed to what you would pay if you earned the same in PAYE (ie o%-6k 20%-41k and 40% thereafter.So by my calculations, if a director paid himself a salary of £6,035/year, then the maximum dividends he could receive to remain under the threshold would be £31,860 (ish), is that correct?
Eric is it therefore beneficial, say if someone is moving from the lower band potentially into the higher band, to take less dividends at first so as to remain in the lower band and possibly just leave it in the co. until it is needed?
To clarify- it doesnt make the blindest bit of difference when you recieve your respective payments of dividends for the year- they are cumulated in your tax return thus you pay tax on the total for the year and not per month or whatever.
seany said:
As a side note, I think that I may be in a good position because my year end is July so I could actually pay myself a salary of £12,070/year tax-free?
Not really. Your personal tax year end is still the same as everyone elses so all that counts in that respect is your earnings up to April 5th. Your company year end date is completely irrelevant to that.Edited by blindswelledrat on Tuesday 9th September 15:46
blindswelledrat said:
Cheers Eric.
So do I understand that earnings as a partnership are taxed in exactly the same way as if it were PAYE?
If so I see why it is pointless.
Once you have arrived at the taxable sole-trader profit (or share of partnership profit), then the tax is calculated exactly as it would be for PAYE. PAYE is only a method of applying Income Tax on on onging basis throughout the tax year.So do I understand that earnings as a partnership are taxed in exactly the same way as if it were PAYE?
If so I see why it is pointless.
There is a difference in the way NI is calculated.
Employees are subject to Class 1 NI - which has two elements to it, the Employee's contribution (which comes out of their gross wages) and the Employer's contribution (which is an additional amount paid by the employer and which most employees are hardly aware of).
Self Em[ployed individuals and Partners pay Class 2 NI (which equates to a flat £2.30 per week and Class 4 NI which is 8% of their profits/share of profits over £6,035 (and a further 1% of their profits or share of profits over the Upper Earnings Limit. Class 2 is paid monthly by Direct Debit or Quarterly by cheque. Class 4 is paid as part of the overall Self Assessment tax bill.
blindswelledrat said:
Seany88 said:
[...
So by my calculations, if a director paid himself a salary of £6,035/year, then the maximum dividends he could receive to remain under the threshold would be £31,860 (ish), is that correct?
Eric is it therefore beneficial, say if someone is moving from the lower band potentially into the higher band, to take less dividends at first so as to remain in the lower band and possibly just leave it in the co. until it is needed?
I think you are missing the point there. It means that the first 35k of dividends is pretty much tax free and anything over that is 30% as opposed to what you would pay if you earned the same in PAYE (ie o%-6k 20%-41k and 40% thereafter.So by my calculations, if a director paid himself a salary of £6,035/year, then the maximum dividends he could receive to remain under the threshold would be £31,860 (ish), is that correct?
Eric is it therefore beneficial, say if someone is moving from the lower band potentially into the higher band, to take less dividends at first so as to remain in the lower band and possibly just leave it in the co. until it is needed?
To clarify- it doesnt make the blindest bit of difference when you recieve your respective payments of dividends for the year- they are cumulated in your tax return thus you pay tax on the total for the year and not per month or whatever.
Edited by blindswelledrat on Tuesday 9th September 15:46
blindswelledrat said:
seany said:
As a side note, I think that I may be in a good position because my year end is July so I could actually pay myself a salary of £12,070/year tax-free?
Not really. Your personal tax year end is still the same as everyone elses so all that counts in that respect is your earnings up to April 5th. Your company year end date is completely irrelevant to that.Part 1: Yes, but I make it 35k or so?
Part2: No you couldn't. Your 6k tax free allowance applies only to your personal tax year eg April 5th.
Hypothetically, of course, if your company ran for one calendar year only, and you earned no money before or after it- then you would indeed have two tax allowances to 'use'.However that is merely coincidence.
But assuming it is an ongoing venture then the only relevant date is April 5th. Your company accounting periods are totally unconnected to your personal tax
Part2: No you couldn't. Your 6k tax free allowance applies only to your personal tax year eg April 5th.
Hypothetically, of course, if your company ran for one calendar year only, and you earned no money before or after it- then you would indeed have two tax allowances to 'use'.However that is merely coincidence.
But assuming it is an ongoing venture then the only relevant date is April 5th. Your company accounting periods are totally unconnected to your personal tax
Edited by blindswelledrat on Tuesday 9th September 16:23
And there are rules you have to be aware of as to ascertaining what tax year income derived from a limited company can be treated as having been paid to the director/shareholder. So you don't have absolute freedom to pick and chose into which tax year you want to split your income from your company (although a clever accountant shoul;d be able to make the right types of accounting adjustments to ensure all the regulations are complied with properly).
To clarify firther, because I understand your confusion but you are looking it in completely the wrong way.
Every Jan 31st you have to pay your personal tax for all money earned up until the Previous April.
Thus if you paid yourself (i.e. your company paid you) 6k in March and then 6k in May and you paid no other money ever- you would get two tax allowances and pay no tax completely regardless of whether it spanned one or two years in your company accounts.
Every Jan 31st you have to pay your personal tax for all money earned up until the Previous April.
Thus if you paid yourself (i.e. your company paid you) 6k in March and then 6k in May and you paid no other money ever- you would get two tax allowances and pay no tax completely regardless of whether it spanned one or two years in your company accounts.
No matter what your company year end is, your personal tax is calculated with respect to your personal income in any given 5 April year end. so, in your example, your accounts ended 31 January (say) 2008, might show an overall salary in the profit and loss account of (say) £10,000, of which £5,000 related to tax year ended 5 April 2007 and £5,000 related to tax year ended 5 April 2008. On the assumption that you had no other income from any other sources in both those tax years, you would not be liable to any Income Tax or NI on those two amounts.
Of course, the Revenue might not be convinced that you were capable of living from just that level of income.
Of course, the Revenue might not be convinced that you were capable of living from just that level of income.
Edited by Eric Mc on Tuesday 9th September 16:36
blindswelledrat said:
Part 1: Yes, but I make it 35k or so?
But don't you need to work back to £35k because of the theoretical dividend tax?Eric Mc said:
No matter what your company year end is, your personal tax is calculated with respect to your personal income in any given 5 April year end. so, in your example, your accounts ended 31 January (say) 2008, might show an overall salary in the profit and loss account of (say) £10,000, of which £5,000 related to tax year ended 5 April 2007 and £5,000 related to tax year ended 5 April 2008. On the assumption that you had no other income from any other sources in both those tax years, you would not be liable to any Income Tax or NI on those two amounts.
Of course, the Revenue might not be convinced that you were capable of living from just that level of income.
Which is exactly my point, that, not taking into consideration dividends at the moment, I was paid £6k up to tax year 5 april 07 and another £6k up to april 08, of which the remaining profit was distributed as dividends, say £31k to tax year april 07 and £31k to april 08.Of course, the Revenue might not be convinced that you were capable of living from just that level of income.
Edited by Eric Mc on Tuesday 9th September 16:36
Is this feasible? I guess its considered tax avoidance but its just clever (but legal) accounting?
It's perfectly legal for a normal trading company.
The Revenue (as you probably know) are not mad keen on people maxing out their dividend income and minimising salaries and they will tackle certain aspects of these types of transactions. The whole Arctic Systems case centered on dividends and how they were paid and to whom they were paid.
IR35 is all about eliminating the opportunity of using dividends for certain types of companies.
However, by and large (at the moment anyway) the Revnue are limited in what they can do.
They keep threatening new legislation to limit the over-use of dividends, but so far it hasn't appeared because it really does open a massive can of worms. They are finding it difficult to stop the use of dividends in circumstances they don't think appropriate but leaving the dividend option open to companies they consider "bona-fide trading family businesses".
The Revenue (as you probably know) are not mad keen on people maxing out their dividend income and minimising salaries and they will tackle certain aspects of these types of transactions. The whole Arctic Systems case centered on dividends and how they were paid and to whom they were paid.
IR35 is all about eliminating the opportunity of using dividends for certain types of companies.
However, by and large (at the moment anyway) the Revnue are limited in what they can do.
They keep threatening new legislation to limit the over-use of dividends, but so far it hasn't appeared because it really does open a massive can of worms. They are finding it difficult to stop the use of dividends in circumstances they don't think appropriate but leaving the dividend option open to companies they consider "bona-fide trading family businesses".
Gassing Station | Business | Top of Page | What's New | My Stuff