Corporation Tax vs Income Tax
Discussion
Does anyone have a simple guide to how corporation tax works with income tax?
In the past 3 or so years my drawings and pension payments have meant I had negligible CT to pay. I've not taken much out of my company this year so I have a large CT bill coming up if the cash is still in the business at year end.
How is this reconciled against my income tax liability if I draw the cash in a later year?
I'll talk to my accountant on Monday but it's suddenly on my mind as I'm getting my books up to date.
In the past 3 or so years my drawings and pension payments have meant I had negligible CT to pay. I've not taken much out of my company this year so I have a large CT bill coming up if the cash is still in the business at year end.
How is this reconciled against my income tax liability if I draw the cash in a later year?
I'll talk to my accountant on Monday but it's suddenly on my mind as I'm getting my books up to date.
If I take all profits as pay/dividends/pension before the end of the company year then there is no CT to pay, and I pay normal Income Tax and NI on the money
If I leave the cash in the company account beyond the end of the company year then I have a Corporation Tax liability. If a day later I take the cash as pay/dividends/pension then I would have Income Tax and NI to pay.
As I understood it the CT wasn't an additional Tax just for leaving cash in the company beyond the end of the year? That means there must be some reconciliation with Income Tax, or have I got that completely wrong?
As you can tell I'm no accountant!
If I leave the cash in the company account beyond the end of the company year then I have a Corporation Tax liability. If a day later I take the cash as pay/dividends/pension then I would have Income Tax and NI to pay.
As I understood it the CT wasn't an additional Tax just for leaving cash in the company beyond the end of the year? That means there must be some reconciliation with Income Tax, or have I got that completely wrong?
As you can tell I'm no accountant!
Stay in Bed Instead said:
Dividends are paid from profits after corporation tax. You could have PAYE & pension contributions to reduce the profit to almost zero.
If you don't utilise the profit as a justifiable expense you will pay corporation tax on it. If you then use it next financial year instead and create a loss for next year, you can reclaim part or all of the corporation tax you will have paid for this year.
Bingo. It was Dividend tax I wasn't factoring in. The rates reflect that it's after Corp Tax. If you don't utilise the profit as a justifiable expense you will pay corporation tax on it. If you then use it next financial year instead and create a loss for next year, you can reclaim part or all of the corporation tax you will have paid for this year.
I'll stop panicking now!
I was using a simple Income tax calculator to estimate my personal taxes for the year, which didn't help.
Edited by 98elise on Saturday 18th January 15:05
Greshamst said:
I know I’m not being helpful here... but you’ve been running a company for three years and still don’t understand the basics around tax? You should educate yourself, it’s a very important part of owning a company...
Google about corporation tax and learn.
I pay an accountant to do that for me. CT isn't something I've needed to address for 3 years so it can easily slip the mind.Google about corporation tax and learn.
Why is asking Google better than asking people?
JulianPH said:
Eric Mc said:
Agreed, People should never be told off for asking questions.
A company pays Corporation tax on its taxable business profits. The taxable business profit is arrived at after allowable business costs have been deducted.
Apart from normal trading costs, such as purchase of supplies and sundry overheads, salaries and their related Employer's National Insurance contributions are also looked on as allowable business costs - so they help to reduce the remaining profit.
An example
Sales - £100,000
Less:
Purchases - £30,000
Overheads - £10,000
Directors Salary (including Employer's NI) - £20,000
Profit for Corporation tax purposes - £40,000
Less:
Corporation Tax at 19% - £7,600
Remaining profit from which dividends can be paid - £32,400
Less:
Dividends - £20,000
Profit carried to reserves - £12,400
Or + £40k pension contribution = £0 CT and profit carried forward! A company pays Corporation tax on its taxable business profits. The taxable business profit is arrived at after allowable business costs have been deducted.
Apart from normal trading costs, such as purchase of supplies and sundry overheads, salaries and their related Employer's National Insurance contributions are also looked on as allowable business costs - so they help to reduce the remaining profit.
An example
Sales - £100,000
Less:
Purchases - £30,000
Overheads - £10,000
Directors Salary (including Employer's NI) - £20,000
Profit for Corporation tax purposes - £40,000
Less:
Corporation Tax at 19% - £7,600
Remaining profit from which dividends can be paid - £32,400
Less:
Dividends - £20,000
Profit carried to reserves - £12,400
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