SB: tax/dividends question

tezar

If you are income is 40% tax bracket.

I believe you only pay 19% tax on profits through a ltd company. But then when you take this profit out of the company in the form of a dividend.
Do you also pay tax with dividends of the profit?

So is there any tax benefit then of setting up a company, if you get charged tax on profits and dividends?

WHA

The company pays 19% corporation tax on profits - correct.
If you are a higher rate taxpayer, you will pay an additional 25% tax on the amount of dividend you receive. You can avoid this higher rate tax (and probably reduce the corporation tax) if you don't take the dividend - i.e. leave profits in the company.

There is no national insurance on dividends (yet). If you were a sole trader (not company), you would have to pay national insurance contributions on the profits made, regardless of whether or not you drew those profits from the company.

Therefore, two of the many advantages of using a limited company - no national insurance on dividends and the potential for "timing" benefits because you can "choose" to draw dividends at a convenient time for tax planning purposes.

koru

I agree with WHA, but a few additional comments:

The 19% rate of CT only applies to profits below a threshhold, which I think is £300,000. If you are lucky enough to have profits higher than that, you pay more.

Below £50,000 profit, you pay only 10% CT, but then there are some complicated rules to increase this to 19% when you take the profits out as a dividend.

Retaining profits does indeed delay tax, and may even reduce tax if you move from being a higher rate tax payer to just the basic rate. But bear in mind that if you retain the profits as cash, most of the high interest deposit accounts (eg, ING) are not available to companies. It may sometimes be better to take the money out, pay the tax, and invest it personally.

Also, beware that cash that is not needed for the purposes of the business may be viewed by the Inland Revenue as an investment, and if the company has too much investments, the IR may decide that the company is not a trading company. This is not good. You should consult an accountant who knows about this stuff.

WHA

koru wrote:

Below £50,000 profit, you pay only 10% CT, but then there are some complicated rules to increase this to 19% when you take the profits out as a dividend.

Not quite.

There is no longer a 10% corporation tax rate.

Instead there is a nil rate of 0% on the first £10,000 of profits. If your profits are between £10,000 and £50,000, you pay a rate between 0% and 19% depending on the exact profit level. The effect of this is to pay no tax on the first £10,000 of profit and then 23.75% on the surplus profits over £10,000.

This calculation is effectively over-ridden if you pay a dividend. The amount of corporation tax on profits paid out as a dividend will always be 19%.