Confused Newbie: Retained profit to pay Corp tax

[johnnylee]

Hi all,

I'm just coming to the end of my first ltd company year and i'm a little confused about retaining funds for Corporation tax.

This is the scenario: I have 69k profits for the company year. I have taken 36k divis and i have the option to invest the bulk of the rest of my profit in a pension to bring the profit right down. So, my idea was to bring the profit right down to approx 36k (the divi) and stash the rest in the pension...thus paying approx £7200 in corp tax on that 36k.

But...im conscious that i have to retain that £7200 so that i can pay the tax. But in doing so, it means my profits rise by the £7200...(because i wont be investing the 7200 in my pension). In turn this means that my corp tax will increase. It appears im stuck in a "retain cash for tax and then pay more tax and then have to retain more money for that tax..etc" spiral.

Can someone with a clearer head than mine at the moment please advise. Much appreciated.

John

[SimonMac]

To walk away with a net profit of £36,000 you must have made a gross profit of £43,560 so your tax would be £7,560

(going at a blanket 21% but not sure how it works with the recent change in corp tax rate mid tax year)

[Taxless]

Leaving aside the whole idea of putting all that sum into a pension by way of a company contribution, whatever profit you have will be taxed at a mix of 21% (to 31/03/11) and 20% (from 01/04/11 to your accounting year end), time apportioned.

Any tax payable is due 9 months and 1 day after the end of your accounting period, and so you should have plenty time (contracts permitting) to build up a cash horde to pay the CT when the dreaded day arrives.

Might be worth a word with your accountant.

[Clare@InTouch]

Hi all,

I'm just coming to the end of my first ltd company year and i'm a little confused about retaining funds for Corporation tax.

This is the scenario: I have 69k profits for the company year. I have taken 36k divis and i have the option to invest the bulk of the rest of my profit in a pension to bring the profit right down. So, my idea was to bring the profit right down to approx 36k (the divi) and stash the rest in the pension...thus paying approx £7200 in corp tax on that 36k.

But...im conscious that i have to retain that £7200 so that i can pay the tax. But in doing so, it means my profits rise by the £7200...(because i wont be investing the 7200 in my pension). In turn this means that my corp tax will increase. It appears im stuck in a "retain cash for tax and then pay more tax and then have to retain more money for that tax..etc" spiral.

Can someone with a clearer head than mine at the moment please advise. Much appreciated.

John

Dividends can only be paid from profits, so you need to have at least £36,000 in profits after tax in order for your dividends to be legal.

For example:

Profits 69,000
Pension 23,400
Taxable 45,600
Tax 9,576
Profit 36,024
Dividends 36,000

Retained 24


If you put more into a pension than £23,400 you won't have enough profit after tax to cover your dividends, and they would be deemed illegal. What would usually then happen is that they would be transferred to a loan account which you'd have to pay back (potentially through a dividend when you had more profit).

So you're not paying more tax by keeping money back, you're keeping money back to pay the CT that arises because you've spent some of your profit on dividends, and if you didn't do that you'd have to repay some of the dividends in order to 'balance the books'.

Incidentally, ensure that any pension contribution leaves the company bank account before the end of the year, it's not something you can accrue for.

[backrubber]

Either of the following two products will enable you to calculate corporation tax, dividends, etc:

Earnings Tracker (free)

My Bookkeeping Manager (99p)

They may be of some help to you.

[johnnylee]

thank you Simon...thats cleared up the confusion. Much appreciated.

John