Self employed tax on drawings help

BoGoF

Mistral001 wrote: »

You would pay normal personal income tax on the £800 (at 20%).

It is in relation to the dividends where the fancy accountancy footwork is done as the rates can be less than those of personal income tax even when combined with the Corporation tax on profits, but only if the profits are above about £35k per year it would seem. However you may save a little NIC.

If the £800 were paid in dividends and they were a basic rate taxpayer then no further tax would be due on them.

Mistral001

BoGoF wrote: »

If the £800 were paid in dividends and they were a basic rate taxpayer then no further tax would be due on them.

Yes that is true just as long as you do not forget that you would have to pay Corporation Tax on it at 20% as corporation tax goes on profit and dividends do not affect profit thus you would be paying 20%CT on the full £1000. Paying yourself £800 is an expense on the other hand and will reduce your profit by exactly £800 and you then would be paying 20% CP on £200 and 20% income tax on £800. Swings and roundabouts.

BoGoF

In the example given, yes the company would've paid CT on the £1000 profit, but in the hands of the director/shareholder no further personal tax is due - that was my point.

Mistral001

Pennywise wrote: »

It's far more than "a little" NIC. Combined employers and employees NIC on payroll is a whopping 25.8%. Self employed NIC for sole traders is 9%. You're very soon into thousands of pounds of NIC even for a basic rate taxpayer. On an "average" profit of say £30k, NIC would be £2,180 for a sole trader as opposed to over £5,000 combined ers and ees NIC if all profits taken as salary under PAYE in a limited company. Is it any wonder that a limited company owner would prefer to draw dividends in order to save thousands of pounds in ers and ees NIC.

NIC is the elephant in the room and it's time it was scrapped and income tax/corporation tax increased accordingly - scrapping it would take away all these problems and put everyone on a more level playing field.

I agree. You are preaching to the converted as far as I am concerned. The massive NIC employers contritutions are helping to prevent small firms taking on employees and growing into big firms etc. etc.

BoGoF

Pennywise wrote: »

It's far more than "a little" NIC. Combined employers and employees NIC on payroll is a whopping 25.8%. Self employed NIC for sole traders is 9%. You're very soon into thousands of pounds of NIC even for a basic rate taxpayer. On an "average" profit of say £30k, NIC would be £2,180 for a sole trader as opposed to over £5,000 combined ers and ees NIC if all profits taken as salary under PAYE in a limited company. Is it any wonder that a limited company owner would prefer to draw dividends in order to save thousands of pounds in ers and ees NIC.

NIC is the elephant in the room and it's time it was scrapped and income tax/corporation tax increased accordingly - scrapping it would take away all these problems and put everyone on a more level playing field.

Indeed but for some bizarre reason it is alleged that the UK taxpayer would not vote for a party that had a (say) 30% tax rate and no NIC but are apparently content to pay 20% tax and 12%(ish) NIC.

Obviously there is the argument for people with pension income but there are ways and means round that issue.

Pennywise

BoGoF wrote: »

Indeed but for some bizarre reason it is alleged that the UK taxpayer would not vote for a party that had a (say) 30% tax rate and no NIC but are apparently content to pay 20% tax and 12%(ish) NIC.

Obviously there is the argument for people with pension income but there are ways and means round that issue.

We agree!!

I am confident that a basic rate (income tax and corporation tax) of between 25-30% would cover the loss of national insurance once it brings in all that unearned income (dividends, rental income, pensions, etc) that is currently being under-taxed because it's not classed as earned income. It would immediately remove a lot of the inconsistency and drastically reduce the scope for "avoidance". The days are long gone when NIC credits meant entitlement state benefits especially with the proposed new fixed pension for all - now most benefits are there for everyone, with or without a NIC credit history, so let's call a spade a spade and call NIC what it really is - a tax!

The pension matter is simple - raise the age allowance from the current £10k or so, to whatever it needs be to avoid any pensioner with income under national average income (say £26k) paying more than they do at the moment, so that means the majority of pensioners wouldn't pay more tax. Any pensioners with incomes more than £26k should be paying the same marginal tax rate as workers, regardless as to whether they've "paid in all their lives" or other such nonsense as they've got a pension income higher than the average worker which deserves the same level of taxation.

I really don't believe the average Joe Public is so stupid as to not realise all the different taxes they're paying. After all, NIC is shown on their payslips so it must be obvious to them how much it it. I think the political pressure will be from the howls of protests of those with currently NIC exempt income - pensioners and those living from investments such as property - the people who've done very well thank you after years of reductions in basic rate tax at the same time as increases in NIC for the workers. I think that "workers" generally are getting pretty fed up now, as can be seen with the backlash against benefit claimants etc., so perhaps the time is right to make such a massive change?

BoGoF

I'm all for it. Sometimes the media frenzy distorts the argument though - hidden agendas?

Mistral001

Pennywise wrote: »

We agree!!

After all, NIC is shown on their payslips so it must be obvious to them how much it it.

Pennywise, Great post.

I have highlighted the above as I have read several threads on the employment forum where people state that they do not actually get a payslip anymore. It is a legal requirement for employers to provide payslips according to the following:

http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074424999&type=RESOURCES

If this legal requirement was enforced better and even changed so that the employer had to show Employer's NIC as well as just employees NIC maybe the public would get the message about what we are talking about