So have I got this right

No

Mark,

The carry forward is a bummer. The argument is it is not retrospective taxation, because it affect furture taxation. This is, IMO, a spurious argument. I would venture that anyone with significant retained profits may be wise to cease trading through that vehicle.

ITD,

I think you still have some confusion. There is no way you can be better off deferring a dividend (caveat personal tax situation could make it so).

I think the root of your problem lies in this statement "If you have already paid over £10k in dividend in this year the corporation tax rate on any additional dividend will be 23.75%".

The additional dividends attract CT of NIL. CT is paid on profits.

So the level of dividend in the current year has no impact whatsoever on the current CT bill. If your profit is 40k there is no difference in CT if you pay divis of 10k or 40k (or even 250k if you have it).

From next year dividends are not taxed at 19% as such. It is simply (?) that the marginal rate of CT is 19% where dividends are paid out.

So, profit this year = 25k. CT = 3562.50. Dividends happend to be 10k.

Profit next year 25k. CT = 3562.50 (If dividends nil).

But next year if dividends were 10k then:-.

'Normal' CT would be: 3562.50 (10k @ 0 + 15k @ 23.75).
Marginal rate = 3562.50 / 15,000 = 14.250%

CT due:

10,000 @ 19% = 1900 (min 19% rate distributed profits)
15,000 @ 14.250% = 2137.50 (marginal rate on retained profits).

Total= 4037.50.

I hope this is now so clear as to be less than completely opaque!

Cheers.

Re: what I dont like

I think I know where I have gone wrong in my calculation.
My scenario would only work if the dividend were delayed until the next tax year.

31st March and 1st April are obviously in the current tax year.

If your personal tax situation allows you to delay paying your dividend until after 5th April I think you could still be better off.

If you have already paid over £10k in dividend in this year the corporation tax rate on any additional dividend will be 23.75%

After 5th April however all dividends will be taxed at 19%, allowing a potential saving of 4.75% for a slightly delayed dividend.

Does this make sense ASB?

what I dont like

is that carry forward.

It looks to me as if anyone with retained profits should be looking at setting up another co, so that they can ensure nil profits while those retained profits are extracted.

Whats the mileage in setting up serial companies ?

Yes

you completely ignored the marginal rate. At no point did iI suggest that 10k was taxed at 19%. What I said was that 10k is taxed at nill at and 40k at 23.75 - exaclty as current. However there is a marginal rate of 19% applicable to all dividends.

All will be obvious (maybe) if you go to: www.inlandrevenue.gov.uk/.../qanda.htm

See question 6 and 7.

The two extremes are:-

50k profit 50k dividend, marginal rate 19%. Additional CT = 0.

10k profit 10k dividend, marginal rate = 0. Additional CT = £1900.

The impact of this is:-

- No dividends, no change.
- Profits in excess of 50k no change

Other circumstances there is an increased tax liability.

Also (if not yet asleep) is that you are in danger of paying up to 19% of any retained profitx in taxation :rolleyes

This is because any distribution in excess of profits is carried forward (this is by definition a distribution of retained profits) thus neatly getting all exisiting retained profits into this scheme.

By example, at the end of this year you have retained profits of 50k. Next year you make nil and distribute 30k.

Your CT bill will still be nil. It's profits that are taxed.

In each of the following 3 years you pay no dividends and earn a profit of 10k. Your tax bill for each of these 3 years will be 1900.

It is only the fact that you have distributed fully taxed money thay crystallise that liability.

The only way out is to ensure profits exceed 50k in the year after making a distribution or are in fact nil. However there will be no additional tax to pay if the business ceases to trade since it is reliant upon future profits being made to attract the tax liability.

Hope this is clear.

Re: Yes

So ASB if I have you correct

Today

£10k @ 0% = 0
£40k @ 23.75% = £9.5K
Total £9.5K

1st April (new rules)

£10K @ 19% = £1.9K
£40K @ 23.75% = £9.5K
Total £11.4K

Now the new rules are supposed to be neutral on £50K, which is £50K @ 19%

I'm not saying you are wrong just that your explanation makes no sense to me....well it is getting late

Yes

You have missed something.

Under the existing system:

Profit 10,001
CT = 23.75p

Under the new system

Profit 10,001
CT =23.75p

But if 10,000 paid as dividend CT = £1,900.2375.. The ruls is that the marginal rate on distributed profits is 19%.

TheFAQon the IR site is actually remarkably clear.

Re: god damn it...

witty reply + pun - no that's why your post never arrives:lol

god damn it...

why can one never think of a witty reply when one needs it?

Mailman

Re: .

If you read the post above mailman you will see that the new regulations don't come into force until April 1st.

Do you know how to read mailman?

.

I am planning on staying in England until the end of our visa's at the least (4 years from Jan).

Im also operating as a limited company (through another company who looks after my tax issues).

Speaking of which I spoke to them this morning and it now appears clear that my dividends from March will not be affected by the change in tax. My original question was brought on by an article on the front page of this website that said payments from March would be subject to the new tax regime.

Regards

Mailman

Re: sort of...

I've been thinking about this new corporation tax.

My final dividend for 2003/4 was due to be declared on 31st March. As I have already earned over £10K in dividends this year, the rate of corporation tax on this dividend would be 23.75%.

If however, I delay the dividend declaration until 1st April when the new rules apply I think I will only have to pay 19%.

It looks to me like a 1 day delay in dividend declaration could save me a few hundred quid......or have I missed something?

sort of...

depends when you invoice - the new rate starts in April

Mailman - you really do need to get an understanding of the difference between corporation tax and personal tax - someone did post a useful explaination for you on one of your other questions.

Are you intending to go back to NZ or stay in the UK ? It would make a difference to how you handle things.

Are you ir35 caught and operating through a brolly or are you a ltd company ?

For my earnings from March Im going to be pinged the new 19% tax rate on dividends?

If so...then that truely sucks as Im being taxed on money I earned BEFORE the ****en law was introduced!

GRR!

thinking happy thoughts...thinking happy thoughts...thinking happy thoughts

Mailman