Limited company tax for the dim

jammycodger

I’ve moved from a sole trader to limited company and I’m still trying to get my head around tax and paying myself a wage from the company. If I run through a hypothetical could you tell me if I’m right?

Company collects £50,000 in a year of trading
My expenses are £5000 for the year (office/internet/blah)
I pay myself (the only employee) wages of £7,696 for the year
I also collect £30,752 dividends

Am I correct in saying that this means I personally take home a tax free “wage” of £38,448 and the sole profit for the company is 50k minus wages and expenses - £6552, so I pay 20% of that amount in tax - £1310.40?

I know this seems obvious but I wanted to clarify the company only pays tax on whats left over at the end of the year? I’ve got used to saving 20-30% of wages as a sole trader automatically - should I get used to leaving tax in the same account and thinking about tax amounts at the end of the year?

theEnd

Not quite. The corp tax comes before the dividend. So company makes 50k - 5k (expenses) - £8k (wages) = £37k.

Corp Tax of 20% is due on the £37k, but there is an allowance (£20k I think, but check this). So Corp tax = (£37k - 20k) * 20%, which is around £3k.

If you then take £31k in divd, there will be a few k left in the company as retained earnings.

If the £7k, plus £31 divd is your only earnings, you'll have very little, if any, extra income tax to pay.

jammycodger

Thanks - so if, say, I had a contract that brought in £2400 a month and all other work dried up, I'd pay no tax on that money so I'd be able to live on £28,800 tax free for the year?

Caz3121

you would be better posting on the tax board here http://forums.moneysavingexpert.com/forumdisplay.php?f=22

(this one if for tax credits/benefits)

Suarez

theEnd wrote: »

Not quite. The corp tax comes before the dividend. So company makes 50k - 5k (expenses) - £8k (wages) = £37k.

Corp Tax of 20% is due on the £37k, but there is an allowance (£20k I think, but check this). So Corp tax = (£37k - 20k) * 20%, which is around £3k.

Where exactly are you getting this 20k allowance from?

Suarez

jammycodger wrote: »

Thanks - so if, say, I had a contract that brought in £2400 a month and all other work dried up, I'd pay no tax on that money so I'd be able to live on £28,800 tax free for the year?

It isnt tax free as you would still be paying corporation tax.

notanewuser

theEnd wrote: »

Not quite. The corp tax comes before the dividend. So company makes 50k - 5k (expenses) - £8k (wages) = £37k.

Corp Tax of 20% is due on the £37k, but there is an allowance (£20k I think, but check this). So Corp tax = (£37k - 20k) * 20%, which is around £3k.

If you then take £31k in divd, there will be a few k left in the company as retained earnings.

If the £7k, plus £31 divd is your only earnings, you'll have very little, if any, extra income tax to pay.

There's no allowance. So corp tax would be £37k * 20% = £7400.

jammycodger

That doesn't make sense to me - so I pay corporation tax on ANY money that comes in? So if I collect money on a job which I then pay to a subcontractor, I have to pay tax on it even though it's not profit?

cox377

No, because the subby would a deducted expense from your balance sheet.

If you took 50k without the subby or 60k with the subby, you would deduct 10k from paying the subby, off your profit. You would only pay 20% corp on the profit made on contracting out to the subby.

To simplify, you have your ins and you have your outs. You just pay 20% corp tax on what's left from the two.

Because you've already paid 20% corporation tax, you then are given a tax free threshold for dividends.

NYM

jammycodger wrote: »

That doesn't make sense to me - so I pay corporation tax on ANY money that comes in? So if I collect money on a job which I then pay to a subcontractor, I have to pay tax on it even though it's not profit?

Revenue (Income) less Expenditure (salary, expenses/outgoings etc) = Profit.

Profit * 20% = Corporation Tax payable

Dividends are paid out of profits which have been already been subject to CT, so you get a tax credit which is off-set against the tax you'd have to pay on your dividend.

Clear as mud.....

jammycodger

Haha, thanks guys.

So essentially the £7,696 is completely tax free and the rest has already had 20% taken off it, but tax free when it reaches me (as long as I have no other income).

Meaning the company/I pay tax of £6150.40 rather than £7689.60 - better than nothing I guess!