Jon12345 started this topic @ 21:17 on 27/11/2004
Just want to clear up how this works.
Let's say you earn a £100K profit in a business. Can you pay yourself a minimum wage and take the rest in dividends? What is the tax rate for dividends?
Also, I have heard corporation tax is lower than income tax. But surely if you leave it in the company, when you do want to draw it then you pay income tax on it and so get taxed twice? Yes?
Jon
RE: Limited Company and Dividends
James Smith | 28/11/2004 09:52 AM
Jon,
in answer to your questions
[i] Can you pay yourself a minimum wage and take the rest in dividends? [/i]
- yes if you do it right
[i] [What is the tax rate for dividends? [/i]
- in the hands of the recipient the effective rate is zero as a basic rate tax payer approx 22% as a higher rate tax payer, although due to tax credits this isn’t quite what appears on the Inland Revenue site. You will see 10% and 32.5% quoted.
[i] Also, I have heard corporation tax is lower than income tax. But surely if you leave it in the company, when you do want to draw it then you pay income tax on it and so get taxed twice? [/i]
- Sort of - companies (broadly) pay tax at 19% on their profits, and as above some dividend income will not be taxed again, and some will. The effective rate of tax for a higher rate tax payer after both corp tax and income tax is a shade under 40%. Under this level it is 19% compared to 33% as a sole trader, hence why it saves you a lot of money being a company. You have actually also hit upon one of the main planning tools of companies - because you are in control of when you pay dividends you are in control of when you actually pay tax which can be very useful if your incomes fluctuate in the area £30-£60k for a one person company.
In practice however you don’t have to worry about any of this - your accountant will prepare all your tax comps and advise you on the best way of taking money out of your company to minimise the tax paid whilst keeping it legal. Generally speaking companies are beneficial from a tax only perceptive (ie ignoring other considerations) once you are making around £15-20k of profit per annum., but you should take proper advice based on your circumstances if you are thinking of opening a limited company as this can be a deceptively large commitment to take on.
Regards,
------------------------
James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773
---------------------------
Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT
RE: RE: Limited Company and Dividends
Jon12345 | 29/11/2004 10:53 AM
Thanks for that. It is what I needed to know to move me from sole trader to Ltd company.
My line of business is ecommerce with most of my business coming from overseas (i.e. USA). Is it worth setting up an offshore company to save tax? Or do the Inland Revenue take a dim view on that? I read something about you are taxed as if it was a UK based company if the control is from the UK. Is that correct? What do they define as control? Most of my stuff is automated.
RE: RE: Limited Company and Dividends
James Smith | 29/11/2004 11:03 AM
If you are from the UK and based in the UK broadly speaking you will be taxed here whatever your offshore structure. There is generally little value in this route unless you are at least non-domiciled (ie not a British citizen), although it can be helpful in some circumstances.
In terms of switching status there are a few different ways of doing this and a few opportunities to save tax by selling the "assets" of the business (even if you don’t have anything physical) to the limited company , so again you should take proper advice (ie not my comments on this forum) over how you do it and what values are attached the transactions and making sure you have gone through all the hoops as its easy to make a hash of this. If you need some help then please let me know.
Regards,
------------------------
James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773
---------------------------
Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT
