Self employed tax on drawings help

Mistral001

My above post assumes that corporation tax is paid on profit net of dividends which I see is not the case. So I would need to adjust for that. Very complex as is evident from following link: http://www.hmrc.gov.uk/taxon/uk.htm

Has anybody got an example of say a Ltd company making a profit of say £30k and the person is single with no family (just to keep things simple). What is the absolute most tax effecient way of getting income from this say if you want to keep say £5k per year in the company for expansion of the company.

Edit: This is not an example which applies to me so I am not looking for free accountancy advice. I have been toying with going Ltd and I want to get a feel for the figures before approaching my accounatnt.

InsideInsurance

POPPYOSCAR wrote: »

You are not 'self-employed' in those circumstances you are an 'employee' of the company.

If you are in a 'partnership' you are 'self-employed'.

Obviously you are technically correct however many, including banks etc, consider you self employed when you are the owner and employee of a Ltd. Hence its worth clarifying with someone when they they are "self employed" if they mean sole trader, partnership, Ltd etc

Firefox1975

Mistral001 wrote: »

My above post assumes that corporation tax is paid on profit net of dividends which I see is not the case. So I would need to adjust for that. Very complex as is evident from following link: http://www.hmrc.gov.uk/taxon/uk.htm

Has anybody got an example of say a Ltd company making a profit of say £30k and the person is single with no family (just to keep things simple). What is the absolute most tax effecient way of getting income from this say if you want to keep say £5k per year in the company for expansion of the company.

Edit: This is not an example which applies to me so I am not looking for free accountancy advice. I have been toying with going Ltd and I want to get a feel for the figures before approaching my accounatnt.

You take £7400 as a salary from the business tax free and then you take £17,600 as a dividend.

(simple answer!)

Mistral001

Firefox1975 wrote: »

You take £7400 as a salary from the business tax free and then you take £17,600 as a dividend.

(simple answer!)

Thus simply put this is as follows:

Sole trader tax on £30,000 profit is:
(30000 -7400)*20/100 = £4520

The Ltd Company tax will be as follows

Corporation Tax = (30000-7400)*20/100 = £4520
Tax on Dividends = ((30000-7400) -4520))*10/100 = £1808
Total tax = £6328

Seems like sole trader is better way to go if you have profits less than £35k

blinko

Mistral001 wrote: »

Thus simply put this is as follows:

Sole trader tax on £30,000 profit is:
(30000 -7400)*20/100 = £4520

The Ltd Company tax will be as follows

Corporation Tax = (30000-7400)*20/100 = £4520
Tax on Dividends = ((30000-7400) -4520))*10/100 = £1808
Total tax = £6328

Seems like sole trader is better way to go if you have profits less than £35k

I would double check the sole trader tax, NI ??

chalkie99

Mistral001 wrote: »

Thus simply put this is as follows:

Sole trader tax on £30,000 profit is:
(30000 -7400)*20/100 = £4520

The Ltd Company tax will be as follows

Corporation Tax = (30000-7400)*20/100 = £4520
Tax on Dividends = ((30000-7400) -4520))*10/100 = £1808
Total tax = £6328

Seems like sole trader is better way to go if you have profits less than £35k

Not quite.

There is no tax to pay on the dividends (up to the level when higher rate income tax kicks in) so the actual tax paid works out pretty much the same.

Where you gain is that you don't pay any National Insurance on dividends so, if you keep your earnings down to just under the NI threshold you won't actually pay any National Insurance at all by taking the profit as dividends.

As a sole trader you would be paying NI on everything over the threshold.

Mistral001

chalkie99 wrote: »

Not quite.

There is no tax to pay on the dividends (up to the level when higher rate income tax kicks in) .

http://www.hmrc.gov.uk/taxon/uk.htm

The way I read the above link is that you have to pay 10% on dividends below £35,000. 32.5% for between £35,000 and £150,000 and 42.5% above £150,000.

Mouse1812

You have to know (remember) that dividends are paid "net". A £9,000 dividend is deemed to be £10,000 gross income with a 10% tax credit. So when you work out your personal tax, the divi rate is 10% (on the gross income) but you are deemed to have already paid it (assuming total income below 40% tax band).

The BIG saving is the class 4 NI, not tax. Class 4 NIC is now 9% on profits over £7,225. So on profits of £30,000 the NI saved is over £2,000.

chalkie99

Mistral001 wrote: »

http://www.hmrc.gov.uk/taxon/uk.htm

The way I read the above link is that you have to pay 10% on dividends below £35,000. 32.5% for between £35,000 and £150,000 and 42.5% above £150,000.

You need to read the whole page - scroll down to "tax credits"

The net result is you do not pay NI on dividends at the level in your example.

Mistral001

chalkie99 wrote: »

You need to read the whole page - scroll down to "tax credits"

The net result is you do not pay NI on dividends at the level in your example.

Thanks chalkie99

I think the smoke and mirrors are beginning to disappear for me now!

The tax credit you are given of 10% has to be taken off and this cancels out the 10%, This 10% is actually deducted from the other rates it would seem meaning that the tax you pay on the dividends is as follows:

0 to 35k (10%-10%) = 0%
35k to 150k (32.5-10%) = 22.5%
150k plus (42.5- 10%) = 32.5%