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!!
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!!
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