Is it worth Creating company to save TAXes?

They aren't double taxed on the dividends. Company pays 20% tax on profits, then the post tax profits can be paid out as dividends - the shareholders won't pay any more tax on receipt of dividends unless they're higher rate taxpayers. Compare that with being a partnership where profits are taxed at either basic or higher rate depending on taxpayer's total income - i.e. 22% or 40%. Overall, tax is remarkably similar either way, i.e. 20%ish if not higher rate and 40%ish if higher rate, assuming all or most profits are withdrawn.

The 40% tax can be sheltered/mitigated if the shareholders don't need to withdraw all the profits, that way they are only subject to the 20% corporation tax and can be left in the company to finance growth/investments/equipment, etc as a sort of tax shelter.

Another thing to remember is to take dividends every year of just enough to use up your annual basic rate band, whether you need the money or not, as the basic rate band is lost if not used.

The big difference is in national insurance. As a partnership they are paying another 8% national insurance which they won't pay if they are a limited company paying a nominal salary made up with dividends. It is the NIC savings that trigger the conversion from partnership to limited company.

Perhaps your friend have not taken dividends in the earlier year and now want to take a high-ish dividend this year which means they are paying 40% tax on some of it, whereas if they'd spread the dividend over the two years equally, there may have been no 40% tax.

Limited companies only work if you know what you're doing - planned right, they will almost always save tax, but there are a few traps along the way that catch some people.

its actually 32.5% tax on higher rate dividends taking into account 10% tax credit you only really pay 22.5% and there is no national insurance charge either.

upto the basic rate band the 10% tax credit satisfies the tax due so in reality you could take just over £30k net tax free which would be worth about £50-55k gross for someone on PAYE. not bad!

computerbar wrote: »

When the dividends are issued to the directors, they are net of tax i.e. 90% issued less 10% tax.
What happens to the 10% tax. Does this 10% tax deducted from dividends payable to HMRC on the top of 19% corporation tax from the company point of view?

Hi Ray,

Hopefully this link will help.

computerbar wrote: »

I meant what would the company do with the 10% deducted from dividends issued? Is that 10% payable to HRMC on top of corporation tax paid?

I don't think so. It is a notional tax credit and not actually paid over, which is why non-tax payers can not received a repayment of the tax credit, as it has never been paid in the first place.