Corp Tax and Dividends

[Martin Underwood]

corp tax

1. Corp tax is a company tax on PROFITS, irrespective of whether you distribute those retained profits.

2. If you took money out as salary, so your profits would reduce (since wages are a form of overhead)

3. If you took money out as dividends (ie. distributing the company's profits to its shareholders), the recipient of the dividend (ie. you) receive a tax credit of 10%. But, dividends (at basic rate) are only taxed at 10%, so you don't pay any futher tax.

4. What the new legislation does is say that IF your profits were in the zero-percent corp tax band, and you choose to distribute those profits to the shareholders rather than keep them in the company for further expenditure in future years, your company will attract a corp tax of 19%.

It really is not that difficult.

[ghoshd]

Re: corp tax

Well, actually my profit will be slightly more than 10K so being above the base rate of less than 10K, and so in this way it seems not to make any difference whether retained or distributed, isn't it? The CT tax will be the same... from what you are saying at least....I am now confused

mathematical equivalent of full CT (dividends out):
First 10,000 --- ?
Between 10,000 and 50,000 ?
50,000 and above --- ?

mathematical equivalent of reduced CT (dividends in):
First 10,000 --- nought 0%
Between 10,000 and 50,000 --23.75%
50,000 and above --- 19%

Jarek

[nobody here but us chickens]

divs

If you take the money out as dividends then you are in effect loosing the 0% band. As a consequence the sliding scale band up to 50K doesnt apply (because it only exists to give the benefit of the 10K at 0%) and all gets hit at 19%

[mailmannz]

Re: divs

BUT...how does one take advantage of that 0% tax band since the instant you take money out of the business means you will get taxed at 19%?

And whats the point of leaving that money in the business if you cant touch it?

Mailman

[Martin Underwood]

0% corp tax band

"BUT...how does one take advantage of that 0% tax band since the instant you take money out of the business means you will get taxed at 19%?"

It depends on who you mean by "one". If you mean "how does THE COMPANY take advantage..." then it can do so by not squandering the small profit through distributing it to the shareholders. Instead, it can be used to fund further expenditure/investment in future years.

If you mean "how do I personally take advantage...": you don't. The 0% corp tax band is designed as a tax break for your COMPANY, not for you personally to take advantage of.


"And whats the point of leaving that money in the business if you cant touch it?"
...so that a genuine small business that makes small profits has an incentive to reinvest its profits rather than distribute them to its shareholders.

You can touch the money, but you'll be taxed at the normal rate if you do.

[mailmannz]

Re: 0% corp tax band

And who determines what a "genuine" small company is? You...the IR? :rollin

Mailman

[Martin Underwood]

genuine

Wow, Mailman, you've really got a beef about something haven't you?

It's got nothing to do with who decides if you are a genuine business. It's simply to do with what TYPE of business the 0% corp tax band was originally designed to help.

Fact: 80% of small businesses fail in the first 5 years of their existence. It is these small businesses, that may be making an extremely small profit, that are helped by not taking a 19% chunk out of their funds!

You have to agree that it was a bit of an own-goal by Gordy to create the 0% corp tax band without thinking of the implications of thousands of shop-keepers, window-cleaners, etc, suddenly incorporating in order to then distribute 10K profits tax-free! hence why the loophole was closed. It's not that difficult really!

[planetit]

Re: genuine

And who determines what a "genuine" small company is? You...the IR?

To answer your question. You decide. You either take the money out and pay tax on it, or leave it in until you either think of something better to do with it; the tax regime changes; or you have a lean year.

[mailmannz]

Re: genuine

Surely leaving the money in the business bank account is not a very good indicator of whether you are a REAL business or not?

Mailman

[silicondale]

well it's your choice, mailman

You take the money out as dividends, your company pays the 19% tax on it. You leave the money in the company, and use it to employ somebody else, or to buy some whizzy new gadgets that help your business grow, or just to sit in a bank account until next year (to tide you over when you don't have a contract). Whatever you decide, it's your choice.

And of course if you do leave it in the company as cash, and the company doesn't make any profit next year, then it doesn't have any corporation tax to adjust - so you don't actually pay any tax when your company pays it to you as dividend. There will of course be a bit of extra tax to pay the next time your company does make a profit - because it's just deferred. So if you have a long period without work next year - better to pay out your dividends and close the company. Then open a new company later if you need one.