Corp Tax and Dividends

[jason986]

Say for example that the limited company makes a taxable profit of £20,000. (50/50 share distribution).

So if I take a salary of £4600 and dividends of £10,000. Does this mean that the company would have to pay £1900 CT (£3800 for both shareholders) and I would have to pay £1000 tax on the dividends (10%)? So the total paid would amount to 29% tax?

If that assumption is correct then what is the advantage of paying dividends as opposed to a straight salary of £14,600 using the above example) other than saving on NI payments?

Thanks

[mailmannz]

The lowest rate is 20 for corp tax. So on £10k you would only pay £2k CT, if I understand the new tax regime right.

Mailman

[Bradley]

Re: Dividends Tax

Profit £20k less Salary £4600 = £15400 chargeable profit

Dividend should be £12756 after CT

CT is £12756 dividend @ 19% = £2424
Add: £15400 less Dividend £12756 = £2644 @ 8.33% effective rate = £220
=> Total CT = £2644

The effective rate is calculated as follows:

CT on £15400 = £5400 @ 23.75% = £1282.50
£1282.50/£15400 = 8.33%

Courtesy of Excel/Tools/Goal Seek and of course the friend of small business, Gordon Brown. Way to go Gordon!

[mailmannz]

Re: Dividends Tax

ARRRRRGHHHHHHHHHHHH...hurry up and bring in the flat rate tax system! :lol

Mailman

[silicondale]

Re Dividends Tax

Bradley - it's even worse than you think.

Gross profit £ 20,000. a salary of £4600 and dividends of £10,000

Profit £20k less Salary £4600 = £15400 profit chargeable to corporation tax -CORRECT

Underlying CT rate on £154000 is calculated as:-
£10000 at 0% = £0
£5400 at 23.75% = £1282.50
Effective tax rate approx 8.33%

When dividends are paid to an individual, the corporation tax on those dividends is 19%. So we have to split the chargeable profits into two pieces:-

Retained profit £5400 chargeable at underlying 8.33%, so the tax is £449.71

Dividends paid £10,000 chargeable at NCD (non-corporate dividends) rate of 19%, so the tax is £1900.

Total corporation tax payable is thus £1900+£449.71 = £2349.71.

It's just as well the whole £15400 wasn't paid in dividends, as paying the corporation tax would leave only £13050.29 available !

However, as long as the shareholders are not higher rate income tax payers, they have no further tax to pay on the dividends.

This is something that ONLY the smallest companies have to think about -thanks a bunch, Gordon. So much for reducing our red tape. We've got enough to decorate a forest of Christmas trees.

[jason986]

Thanks

Thanks - yes I understand that the personal tax on the dividends is nil in the above example. Just 19% CT tax.

So it does make sense to take the divi's as opposed to salary.

Cheers
Jason

[xoggoth]

Re: Thanks

Please do not refer to Gordon lying-fat-ugly-incompetent-Scottish-bastard Brownstuff as Gordon Brown or, even worse, Gordon. It's not his correct name.

[silicondale]

Only 15.8%

Actually, the NCD rate isn't even 19%. Because it's corporation tax, it's calculated a bit differently. Let's say you pay £1000 dividend out of profits of £10,000 or less. Then there's just £190 corporation tax to pay. The total of dividend and tax is £1190. So the effective tax rate is actually £190 / £ 1190 = 16% approximately. So not as bad as it looks at first.

[Bradley]

Re:GB

Please do not refer to Gordon lying-fat-ugly-incompetent-Scottish-bastard Brownstuff as Gordon Brown or, even worse, Gordon. It's not his correct name

Can I just call him Sluggo from now on instead then?

[ghoshd]

23.75%?

How is this number - 23.75% calculated as in 5400 @ 23.75%? Is this a tax rate, I haven't seen this in any of the tax tables?

Thanks

Jarek