Question about providing funding for a Ltd Company

dividend income,

notional 10% tax

than

treated

told.

Well this sounds great i.e. paying myself 32065 per year and not paying any IT or NIC on this money; it seems to good to be true - so what's the catch? Surely most self employed people pay loads of tax every year. The average yearly income is around 24K yes? So, do the majority of UK residents live tax free (that is if they are the directors of a Ltd company)?

Further what effect does paying the 27450 have on the CT.

Say the company had made a profit of 27450 which was going to be liable to CT but instead is now paid to me via a dividend instead?

Reply to
Graeme Nicholson
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"Graeme Nicholson" wrote

None whatsoever.

"Graeme Nicholson" wrote

The company would still need to pay the CT: (27,450-10,000) x 23.75% 4,144.38.

With a profit of 27,450, you'd need to pay out no more than 23,305.62 net dividends. To pay 27,450 net dividends, you need a profit of at least 32,885.25 (paying

5,435.25 CT).
Reply to
Tim

Yes, you get taxed on the profits made, irrespective of whether they have been spent, or on what.

Reply to
Ronald Raygun

That's why a lot of very small businesses do incorporate. Often they will be husband/wife teams, e.g. a plumber who goes out on jobs while the spouse staffs the office and keeps the books.

On the other hand, if you pay out all the profits as salary, this would be an allowable expense for the company, and no CT would be due. The problem is, though, that income tax and employee's NI and employer's NI would together add up to more than the tax otherwise paid in CT+DIT.

None. The company pays CT on profit, and what's left is available to be spent either as re-investment, or disbursed as dividends, or simply kept in the company as acash reserves for future use.

In order to pay a dividend of £27450 it would have to have that much in its coffers after CT had already been paid, so profits would have had to have been £32885 (CT would be 23.75% of £22885).

Alternatively, if it had made £27450 profits, CT would be 23.65% of £17450 so only £23306 would be available to pay as divis.

Reply to
Ronald Raygun

instead?

23.75% > 4,144.38.

I've been looking @

formatting link

Marginal relief eases the transition from the starting rate to the small companies' rate for companies with profits between 10,000 and 50,000. The fraction used in the calculation of this marginal relief will be 19/400

Can somebody please explain how to use this 19/400 fraction.

For instance above you say "The company would still need to pay the CT: (27,450-10,000) x 23.75% = 4,144.38."

How did you work this out?

Reply to
Graeme Nicholson

"Graeme Nicholson" wrote

Groan....

(19% x 27,450) - { (50,000-27,450) x [19/400] } = 5,215.50 - 1,071.12 4,144.38.

Reply to
Tim

Yes, they will expect you to pay it into the business, and not spend it on a holiday, but I can't see where share capital comes in to it. I've seen banks lend to companies with £1 share capital before.

Reply to
Jonathan Bryce

Graeme, take no notice of Tim's groan. "Marginal relief" is a pretty opaque concept to grasp. It's much easier to think of the way the banding of CT works by comparing it with the way normal income tax works.

For IT, as you know, the first £4615 are taxed at 0%, the next £1960 at 10%, the next £28540 at 22%, and the rest at 40%.

With CT, the first £10k are taxed at 0%, the next £40k at 23.75%, the next £250k at 19%, the next £1250k at 32.75%, and the rest at 30%.

The thing is, though, that if you draw a tax payable vs taxable income or profit diagram, the line segment for profits between £50k and £300k not only has a slope of 19%, but also, if extended, happens to go through the origin. The same is true of the line for profits above £1500k. The trouble is, in order for the curve to join up, the line segment slope for profits between £10k and £50k has to be *bigger* than 19% in order to catch up.

It's like one of those quiz questions. Cars A and B travel the same distance. Car A travels at 19mph for 50mins, car B waits for 10 mins before moving off. How fast does car B have to travel in order to catch up with car A in 40 mins? - Answer: 23.75mph.

But a 23.75% marginal rate sounds bad, so the spin put on it is that you get "relief" to the effect that if your profit happens to be, say, £20k, then instead of paying 19% of £20k you pay that amount *minus* this airy-fairy marginal relief calculated at

19/400 (i.e. 4.75%) of the profit shortfall relative to £50k. So the "official" calculation is that CT is 19% of £20k minus 4.75% of (£50k-£20k), i.e. £3800-£1425 = £2375. But the more natural way to work it out is 0% of the first £10k plus 23.75% of the next £10k. The result is the same, but the official method avoids the notion of the marginal rate, and therefore the idea of that rate being higher than the basic rate.

Likewise for profits between £300k and £1500k, where tax at and above the upper point is 30%, between the two points it is spun as giving a "relief" of 11/400 (2.75%) which in effect makes the marginal rate between those limits 30% *plus* 2.75%.

Reply to
Ronald Raygun

to the

10,000

marginal

pay

pretty

You're not wrong and thanks for taking the time to explain. Unlike TIm I wasn't born with "inherent knowledge of tax system" so I have to ask this sort of question.

Reply to
Graeme Nicholson

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