Corporation tax and Capital Gains
Discussion
Morning,
I'm using the holiday to educate myself a bit more on how my business is taxed, for over 6 years now the accountant has just "done the books" and I really dont have the slightest clue how it all works.
VAT is easy peasy, no problems there,
NI and the minimum salary taken by the directors is fairly straight forward too.
What I'm a bit confused about it Corporation Tax and Capital Gains and how they work together.
I've got some kind of half arsed understanding about how one "offsets the other one" ??? or something to that effect, essentially a director doesnt end up paying twice for a dividend..
I may have this completely wrong however...
Anyone got a good link or some info on how a dividend taken by a director of a Limited Company is taxed? both from the point of view of the company and the director, (hope that makes sense)
Thanks!
I'm using the holiday to educate myself a bit more on how my business is taxed, for over 6 years now the accountant has just "done the books" and I really dont have the slightest clue how it all works.
VAT is easy peasy, no problems there,
NI and the minimum salary taken by the directors is fairly straight forward too.
What I'm a bit confused about it Corporation Tax and Capital Gains and how they work together.
I've got some kind of half arsed understanding about how one "offsets the other one" ??? or something to that effect, essentially a director doesnt end up paying twice for a dividend..
I may have this completely wrong however...
Anyone got a good link or some info on how a dividend taken by a director of a Limited Company is taxed? both from the point of view of the company and the director, (hope that makes sense)
Thanks!
Capital Gains Tax only arises when a company or an individual makes a disposal of a capital asset. Even then, certain assets are excluded from Capital Gains Tax computations.
A company will be subject to Capital Gains Tax if it sells some sort of major asset such as land and/or buildings.
The same holds true for an individual.
Companies pay Capital Gains Tax at a rate matched to their Corporation Tax rate.
Individuals pay Capital Gains Tax at 18%. However, if the asset being disposed of by an individual is a "business asset", the Capital Gain is charged at a special low rate of 10%.
Regarding normal day to day taxation on business income and income drawn from the company, companies pay Corporation Tax (usually at 21%) on their business profits.
Individuals pay Income Tax, and sometimes National Insurance, on the income they extract for themselves from their own company.
If they extract the income as salary/remuneration, they will have to deduct PAYE Income Tax and Class 1 Employee's National Insurance from the Gross Salary amount.
The company will also have to pay the additional Class 1 Employer's National Insurance on top of the agreed Gross Salary amount.
The good news is that salary and Employer's NI count as a legitimate business deduction in the company's profit and loss account and will help reduce the company's business profit and therefore reduce its Corporation Tax liability.
If they extract income from the company in the form of a dividend (as a shareholder), they will only be subject to Income Tax on the dividend. No National Insurance (either employee's or employer's ) will be due.
Dividends are also taxed very favourably, in the sense that an individual pays no tax whatsoever on a dividend if their overall personal income in a given tax year is not high enough to place them into the Higher Rate Tax bracket (currently income exceeding £43,875)
Their is one downside to using dividends in that dividends are deducted from the business profits AFTER the Corporation Tax has been calculated. In other words, unlike salay, dividends do not count as a deductible expense for Corporation Tax purposes.
This makes the calculation as to what the best option is (dividends v' salaries) a bit complicated.
Under the current tax rates, it is generally agreed that when a company starts making taxable profits of over £40,000, the dividend route starts to become attractive.
For many people, dividends are the favoured approach wherever possoible.
Another point about dividends is that there are restrictions on when they can be paid. Essentially, a company must have sufficient profits/reserves out of which dividends can be paid. Also, dividends should not be paid to directors if the company has other commitments. It is against the law for a company director to treat himself/herself preferentially.
HMRC are also wary of dividends when they appear to be paid too frequently e.g. every month. If payments are made to a director/shareholder that often, HMRC might argue that the payments can't be genuine dividends as they are happening too often. PLCs usually only pay out dividends twice a year (an interim and a final dividend) for example.
They expect dividend payments to be supported by board meetings and their respective minutes. They also expect dividend vouchers to have been issued to each shareholder when the dividends are paid as all PLCs do).
A company will be subject to Capital Gains Tax if it sells some sort of major asset such as land and/or buildings.
The same holds true for an individual.
Companies pay Capital Gains Tax at a rate matched to their Corporation Tax rate.
Individuals pay Capital Gains Tax at 18%. However, if the asset being disposed of by an individual is a "business asset", the Capital Gain is charged at a special low rate of 10%.
Regarding normal day to day taxation on business income and income drawn from the company, companies pay Corporation Tax (usually at 21%) on their business profits.
Individuals pay Income Tax, and sometimes National Insurance, on the income they extract for themselves from their own company.
If they extract the income as salary/remuneration, they will have to deduct PAYE Income Tax and Class 1 Employee's National Insurance from the Gross Salary amount.
The company will also have to pay the additional Class 1 Employer's National Insurance on top of the agreed Gross Salary amount.
The good news is that salary and Employer's NI count as a legitimate business deduction in the company's profit and loss account and will help reduce the company's business profit and therefore reduce its Corporation Tax liability.
If they extract income from the company in the form of a dividend (as a shareholder), they will only be subject to Income Tax on the dividend. No National Insurance (either employee's or employer's ) will be due.
Dividends are also taxed very favourably, in the sense that an individual pays no tax whatsoever on a dividend if their overall personal income in a given tax year is not high enough to place them into the Higher Rate Tax bracket (currently income exceeding £43,875)
Their is one downside to using dividends in that dividends are deducted from the business profits AFTER the Corporation Tax has been calculated. In other words, unlike salay, dividends do not count as a deductible expense for Corporation Tax purposes.
This makes the calculation as to what the best option is (dividends v' salaries) a bit complicated.
Under the current tax rates, it is generally agreed that when a company starts making taxable profits of over £40,000, the dividend route starts to become attractive.
For many people, dividends are the favoured approach wherever possoible.
Another point about dividends is that there are restrictions on when they can be paid. Essentially, a company must have sufficient profits/reserves out of which dividends can be paid. Also, dividends should not be paid to directors if the company has other commitments. It is against the law for a company director to treat himself/herself preferentially.
HMRC are also wary of dividends when they appear to be paid too frequently e.g. every month. If payments are made to a director/shareholder that often, HMRC might argue that the payments can't be genuine dividends as they are happening too often. PLCs usually only pay out dividends twice a year (an interim and a final dividend) for example.
They expect dividend payments to be supported by board meetings and their respective minutes. They also expect dividend vouchers to have been issued to each shareholder when the dividends are paid as all PLCs do).
You Sir, are a legend!
I completely had the wrong end of the stick! We're not paying capital gains at all.
So the first £43,875 is essentially "free" after Corporation tax and NI contributions (employers and personal).
After that standard income tax is applied, at what rate? starting from the personal allowed through the different tax brackets
or straight in at the high rate? I'm guessing the later? 40% currently? which means if our dividends are over 100k in a year we wil be paying
the new 50% rate whenever that comes into force (if its not already).
Another question (sorry) As I understand it we currently take pretty much 100% of profits from the company as dividends every year (barring the usual small salary)
and leave at least 50% of that in the company bank account(s), so tax is paid at that years rate, it then becomes a "loan" from the directors to the company which we
can then draw at any time essentially tax free as all the tax has already been paid.
Does this sound about right?
I completely had the wrong end of the stick! We're not paying capital gains at all.
So the first £43,875 is essentially "free" after Corporation tax and NI contributions (employers and personal).
After that standard income tax is applied, at what rate? starting from the personal allowed through the different tax brackets
or straight in at the high rate? I'm guessing the later? 40% currently? which means if our dividends are over 100k in a year we wil be paying
the new 50% rate whenever that comes into force (if its not already).
Another question (sorry) As I understand it we currently take pretty much 100% of profits from the company as dividends every year (barring the usual small salary)
and leave at least 50% of that in the company bank account(s), so tax is paid at that years rate, it then becomes a "loan" from the directors to the company which we
can then draw at any time essentially tax free as all the tax has already been paid.
Does this sound about right?
davido140 said:
You Sir, are a legend!
I completely had the wrong end of the stick! We're not paying capital gains at all.
So the first £43,875 is essentially "free" after Corporation tax and NI contributions (employers and personal).
After that standard income tax is applied, at what rate? starting from the personal allowed through the different tax brackets
or straight in at the high rate? I'm guessing the later? 40% currently? which means if our dividends are over 100k in a year we wil be paying
the new 50% rate whenever that comes into force (if its not already).
Another question (sorry) As I understand it we currently take pretty much 100% of profits from the company as dividends every year (barring the usual small salary)
and leave at least 50% of that in the company bank account(s), so tax is paid at that years rate, it then becomes a "loan" from the directors to the company which we
can then draw at any time essentially tax free as all the tax has already been paid.
Does this sound about right?
Income Tax on dividends is quite bonkers really - thanks to changes Gordon Brown made in 1998.I completely had the wrong end of the stick! We're not paying capital gains at all.
So the first £43,875 is essentially "free" after Corporation tax and NI contributions (employers and personal).
After that standard income tax is applied, at what rate? starting from the personal allowed through the different tax brackets
or straight in at the high rate? I'm guessing the later? 40% currently? which means if our dividends are over 100k in a year we wil be paying
the new 50% rate whenever that comes into force (if its not already).
Another question (sorry) As I understand it we currently take pretty much 100% of profits from the company as dividends every year (barring the usual small salary)
and leave at least 50% of that in the company bank account(s), so tax is paid at that years rate, it then becomes a "loan" from the directors to the company which we
can then draw at any time essentially tax free as all the tax has already been paid.
Does this sound about right?
A typical scenario -
Salary - £5,700 (just below the NI threshold)
Dividend actually paid - £34,000. This is "deemed" to be 90% of the true value of the dividend. A "notional" 10% income tax amount is shown on the dividend - although this 10% tax is never actually paid to HMRC.
This is how income tax is applied -
Gross Salary - £5,700
Grossed-Up Dividend - £37,778 (£34,000 x 100/90)
Total Income - £43,478
As the total income is below the £43,875 threshold, there is no Income Tax liability arising on your personal income for the year.
If the dividend was for a higher amount, then some Income Tax would be due - an example -
Gross Salary - £5.700
Dividend - £50,000
Taxed as follows -
Gross Salary - £5.700
Grossed Up dividend - £55,556 (£50,000 x 100/90)
Total Income - £61,255
Less the Personal Tax Allowance and basic rate band of £43,875 leaves a taxable amount of £7,380.
This will be taxed at the higher rate.
However, there is a further complication with dividends. When the income being taxed at the Higher Rate is has arisen because of dividends (as opposed to salary, interest, rental income etc etc), then the Higher Rate used is not the normal 40% but a special Dividend Higher Rate which is set at 32.5% (go figure - Gordon was sniffing something at the time, I expect).
Therefore, the tax liability arising will come to £2,399 (£7,380 x 32.5%).
This tax is paid under the Self Assessment tax system.
Thanks Eric
I am self employed as a sole trader paying stupid tax & NI & various accountants say stay as i am. I am now going to set up as Ltd having read your post. Another point to mention is if you are a sole trader like me when you fall on hard times you cannot claim a penny from the state, even if you have worked paid tax & NI for 30years you’re on your own. Application in tomorrow’s post.
I am self employed as a sole trader paying stupid tax & NI & various accountants say stay as i am. I am now going to set up as Ltd having read your post. Another point to mention is if you are a sole trader like me when you fall on hard times you cannot claim a penny from the state, even if you have worked paid tax & NI for 30years you’re on your own. Application in tomorrow’s post.
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