Dividend Corporation Tax treatment
Discussion
Previously (27th March 06) EricMc wrote:
Since 1 April 2004, dividends have been subject to a special Corporation Tax charge of a straight 19%.
This is being abolished with effect from 1 April 2006.
So, if you intended to pay youself a dividend before the end of the personal tax year, i.e 5 April 2006, the clever thing to do might be to defer any such dividends into the window 1 April 2006 to 5 April 2006, this avoiding the 19% Corporation Tax charge.
So, does this mean that our little Ltd company could pay the 3 shareholders dividends without the company incurring any Corp Tax liability? I think I must be mis-understanding this (but hope I'm not!).
Eric Mc said:
Since 1 April 2004, dividends have been subject to a special Corporation Tax charge of a straight 19%.
This is being abolished with effect from 1 April 2006.
So, if you intended to pay youself a dividend before the end of the personal tax year, i.e 5 April 2006, the clever thing to do might be to defer any such dividends into the window 1 April 2006 to 5 April 2006, this avoiding the 19% Corporation Tax charge.
So, does this mean that our little Ltd company could pay the 3 shareholders dividends without the company incurring any Corp Tax liability? I think I must be mis-understanding this (but hope I'm not!).
I presume you are asking about the situation post 31 March 2006.
Companies still pay Corporation Tax on their trading profits. This tax is calculated BEFORE any deductions for dividends are made. Therefore, if a company makes a profit of £20,000 and paid dividends to the shareholder of £15,000, the Corporation Tax is calculated on the profits of £20,000, not £5,000 (£20,000 minus £15,000).
The other change made by Gordon was that the £10,000 Zero Rate Profit band was abolished so it is important to remember that every £1 of profit of the company is now subject to Corporation Tax.
Companies still pay Corporation Tax on their trading profits. This tax is calculated BEFORE any deductions for dividends are made. Therefore, if a company makes a profit of £20,000 and paid dividends to the shareholder of £15,000, the Corporation Tax is calculated on the profits of £20,000, not £5,000 (£20,000 minus £15,000).
The other change made by Gordon was that the £10,000 Zero Rate Profit band was abolished so it is important to remember that every £1 of profit of the company is now subject to Corporation Tax.
Eric Mc said:
I presume you are asking about the situation post 31 March 2006.
Companies still pay Corporation Tax on their trading profits. This tax is calculated BEFORE any deductions for dividends are made. Therefore, if a company makes a profit of £20,000 and paid dividends to the shareholder of £15,000, the Corporation Tax is calculated on the profits of £20,000, not £5,000 (£20,000 minus £15,000).
The other change made by Gordon was that the £10,000 Zero Rate Profit band was abolished so it is important to remember that every £1 of profit of the company is now subject to Corporation Tax.
Companies still pay Corporation Tax on their trading profits. This tax is calculated BEFORE any deductions for dividends are made. Therefore, if a company makes a profit of £20,000 and paid dividends to the shareholder of £15,000, the Corporation Tax is calculated on the profits of £20,000, not £5,000 (£20,000 minus £15,000).
The other change made by Gordon was that the £10,000 Zero Rate Profit band was abolished so it is important to remember that every £1 of profit of the company is now subject to Corporation Tax.
OK, thanks - so (referring to your 27th March post again) was there effectively a CT 'holiday' from 1st to 5th April 06? That seems like a bit of a clanger for Gordon to drop.
It wasn't quite a "holiday".
Between those two dates, the dividend could be paid to an individual within their personal Income Tax year ended 5 April 2006 without the company suffering the weird Non-Corporate Dividend Corporation Tax charge but allowing the individual to "top up" their personal dividend income before 5 April - if they wanted to.
Between those two dates, the dividend could be paid to an individual within their personal Income Tax year ended 5 April 2006 without the company suffering the weird Non-Corporate Dividend Corporation Tax charge but allowing the individual to "top up" their personal dividend income before 5 April - if they wanted to.
It removed the Non-Corporate Dividend tax charge - which was a nonsense (and possibly illegal) so that is good. However, Gordon also removed the £10,000 Zero Rate Corporation Tax band. So most small companies will pay more tax than they did before 31 March 2004 but less than they did for the years to 31 March 2005 and 31 March 2006 (given similar circumstances).
Gordon was essentially correcting some dumb decisions he had previously made but, Gordon being Gordon, he had to pretend it was all part of his "grand scheme" for benefitting small business. If most of us couldn't see his logic, that was because we aren't blessed with his blinding intellect and genius.
Gordon was essentially correcting some dumb decisions he had previously made but, Gordon being Gordon, he had to pretend it was all part of his "grand scheme" for benefitting small business. If most of us couldn't see his logic, that was because we aren't blessed with his blinding intellect and genius.
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