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What's the point in setting up a company and paying dividends?!

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    What's the point in setting up a company and paying dividends?!

    Ok I have read and re-read guidance and posts on this site and I still don't understand... sorry..
    We have 2 directors/shareholders, one earning £20k p.a. and the other £40k p.s. in their full time jobs. We rent a house for holiday lettings and have set up a company for that purpose. At the end of the year we have £2.5k profit (wow I hear you say..). As you have to pay corporation tax on profits of 20% before you pay a dividend, why pay a dividend? Director A will have no further tax liability (but if she was paid it as e.g. an admin charge it would count as an expense so the 20% would be paid as income tax) and Director B will have 22.5% to pay on the dividend (32.5% less 10% tax credit) which means he has paid a 42.5% tax bill in total (20% corp tax and then 22.5 income) rather than a 40% income tax if he was just paid it directly. I just don't get it... Any guidance would be much appreciated!!

    #2
    1) Include national insurance in your calculations
    2) go back to 1) and include employers national insurance too
    3) be enlightened.
    ‎"See, you think I give a tulip. Wrong. In fact, while you talk, I'm thinking; How can I give less of a tulip? That's why I look interested."

    Comment


      #3
      No National Insurance (ers or ees) is due on dividends, but is due on PAYE income.

      Comment


        #4
        32.5% is charged on a net dividend grossed up by 10%, whereas the distributed amount carries a de facto 20% credit.

        EG profits £10,000

        In a company, assuming (a) shareholder is 40% tax payer and (b) full distribution, position is:

        £10,000 less Corporation Tax 20% = £8,000. Taxable dividend £8,889 @ 22.5% = £2,000 personal tax. Total tax £4,000

        In a equivalent non incorporated business, £10,000 profit, personal tax at 40% = £4,000

        Voilla ici!

        And then, as Moscow Mule says there is NI to think on - and for a holiday let thats a moot point, as to whether there is a sufficient trading nexus for Class II / Class IV to apply.

        More to the point, I would question - although the horse may have bolted - the decision to hold a holiday let in a company. Its a fiscal disaster for CGT / IHT.

        Comment


          #5
          Sounds like you really need to sit down and speak to an accountant. General advice on here is not to bother running property through a LTD due to you having to pay CT on any profits realised and so on but most of us are not higher rate tax payers so advice may change for your situation.

          I think a good accountant could save you a packet here....
          'CUK forum personality of 2011 - Winner - Yes really!!!!

          Comment


            #6
            Originally posted by Novice View Post
            As you have to pay corporation tax on profits of 20% before you pay a dividend, why pay a dividend?
            The others have pointed out the main reason to operate in this fashion, extrapolate that out to your company having a much larger profit, and you not having normal salaries as well and you will see the benefit even more clearly of paying dividends.

            But for the bit I quoted above, it is very strangely worded.

            The money remaining after you pay your corporation tax is your profits. And from those profits you can then pay dividends.

            You MUST pay corporation tax, but you do not have to take dividends if you do not want to. Your current circumstances might mean it may be better leaving the money in the company for now.

            Comment


              #7
              Originally posted by Novice View Post
              Ok I have read and re-read guidance and posts on this site and I still don't understand... sorry..
              We have 2 directors/shareholders, one earning £20k p.a. and the other £40k p.s. in their full time jobs. We rent a house for holiday lettings and have set up a company for that purpose. At the end of the year we have £2.5k profit (wow I hear you say..). As you have to pay corporation tax on profits of 20% before you pay a dividend, why pay a dividend? Director A will have no further tax liability (but if she was paid it as e.g. an admin charge it would count as an expense so the 20% would be paid as income tax) and Director B will have 22.5% to pay on the dividend (32.5% less 10% tax credit) which means he has paid a 42.5% tax bill in total (20% corp tax and then 22.5 income) rather than a 40% income tax if he was just paid it directly. I just don't get it... Any guidance would be much appreciated!!
              You post is abit convoluted but:

              You will pay CT on the profits regardless of whether you pay a dividend or not.

              Do not mix up personal and corporate taxation, they are not the same thing. Director B will pay the the higer rate tax on dividends over the upper limit. Director B's personal tax bill wil be higher, because he has gone over the threshold. Corporation tax is paid by the company regardless.

              Remember dividends have to be paid according to the share allotment. If there are two shareholders (not clear from the OP) then both must be paid a dividend in proportion to their share holding.

              Athough Director A may not incure additional income tax from the money being paid as a salary there would be empoyers and employee's NI to take into account of that may be complicate by the NI requirements of ther full time job. Trying to pay them the money as any other form of payment (admin charge?) then it will still be classed as income and taxed as such.

              You can either:

              Leave the money in the company to be used to cover operating costs next year without having to pay them yourselves and claim it back from the company.

              Or, if you really need the cash make Director A the sole share holder and pay it to them as a dividend with no further tax to pay assuming there is no other income totake into account that might put them into the higher rate bracket.
              "Being nice costs nothing and sometimes gets you extra bacon" - Pondlife.

              Comment


                #8
                If the company pays salary then they have to pay employer's NI and employee's NI on top of the PAYE so that's a lot of tax.

                There are a few options:
                • The higher earning shareholder can sign a dividend waiver and pay the whole dividend to the lower earning shareholder
                • Retain the money in the company for a rainy day and draw it later
                • Spend the money on renovating the house (or some such expense) so the company makes no profit at all and doesn't have to pay CT


                Lots of people here say not to do a buy-to-let through a company though. I think it was something to do with the way the capital gain on selling the property...
                Free advice and opinions - refunds are available if you are not 100% satisfied.

                Comment


                  #9
                  Originally posted by northernladuk View Post

                  I think a good accountant could save you a packet here....
                  Even a bad one would deliver a saving!
                  https://uk.linkedin.com/in/andyhallett

                  Comment


                    #10
                    Thanks

                    Originally posted by Jessica@WhiteFieldTax View Post
                    32.5% is charged on a net dividend grossed up by 10%, whereas the distributed amount carries a de facto 20% credit.

                    EG profits £10,000

                    In a company, assuming (a) shareholder is 40% tax payer and (b) full distribution, position is:

                    £10,000 less Corporation Tax 20% = £8,000. Taxable dividend £8,889 @ 22.5% = £2,000 personal tax. Total tax £4,000

                    In a equivalent non incorporated business, £10,000 profit, personal tax at 40% = £4,000

                    Voilla ici!

                    And then, as Moscow Mule says there is NI to think on - and for a holiday let thats a moot point, as to whether there is a sufficient trading nexus for Class II / Class IV to apply.

                    More to the point, I would question - although the horse may have bolted - the decision to hold a holiday let in a company. Its a fiscal disaster for CGT / IHT.

                    Thanks to all of you for your words of wisdom. We don't pay salaries (not enough profit unfortunately) so PAYE/NI considerations are out. And we don't hold the property in the company, we rent it (cheaply, again due to not much profit) from the shareholders/directors. So the ltd company is effectively a booking agent. As I understand your posts, there's no point in paying a dividend. Even if we make the basic rate tax payer the sole shareholder we still pay 20% CT on the profits versus paying her the £2000 for doing the administration and her paying 20% income tax...

                    Comment

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