Confused about company LTD tax

Poshsalt

Self employed tax assessment Personal Allowance £12,5k then £12,571 to £50,270 20%

Starting a limited business, Company Tax is 19%

So on all profits that come into the business I have to pay 19%.

So lets say I made £50k profit, I first pay 19% from the profits. Leaving £40,500.

Then with the directors salary I take £12,5 (tax free) and £2k dividend out (tax free), then £35,500 dividend @7.5%

With tax liability on the £50k being £3,500, paying 7% tax rate.

So taxs on the  £50,000 would be £9,500 + £3,500 = £13,000. (not including NI)

Would you say this is correct? If so wouldnt it be better off being self employed.

Pennywise

No, it's not correct as your director's salary is deducted from profit.  So corp tax would be 19% on £37.5k not on £50k.

Sandtree

First of all directors salary and its Employers NI is a company liability so you take that off the earnings before calculating the corporation tax. 

Secondly, assuming this is a PSC, then the dividends are taxed at a different rate which partially recognises the fact they are already taxed

MattMattMattUK

Poshsalt said:

Self employed tax assessment Personal Allowance £12,5k then £12,571 to £50,270 20%

Starting a limited business, Company Tax is 19%

So on all profits that come into the business I have to pay 19%.

So lets say I made £50k profit, I first pay 19% from the profits. Leaving £40,500.

Then with the directors salary I take £12,5 (tax free) and £2k dividend out (tax free), then £35,500 dividend @7.5%

With tax liability on the £50k being £3,500, paying 7% tax rate.

So taxs on the  £50,000 would be £9,500 + £3,500 = £13,000. (not including NI)

Would you say this is correct? If so wouldnt it be better off being self employed.

It is always more tax efficient to pay PAYE up to the threshold then take the rest of the profit as dividend (currently, based on the 19% Corporation Tax rate, for low and middle earners it will probably not be once the government jacks CT up to 25%). However accounts for a Ltd are usually more expensive than for a sole trader, so on that basis it is not always worth it, personally I think the benefit of limited liability, even where the risk is tiny, outweighs anything else. 

Sandtree

MattMattMattUK said:
for low and middle earners it will probably not be once the government jacks CT up to 25%

Remember its a tapered rate that they are proposing to put in and at under £50k profit that the OP has suggested they would remain on 19%. Full 25% requires profits over £250,000

Poshsalt

Thanks for you replies.

I do have another  question, to try keep it simple.

Lets say the £50k comes in profit, I take £12k out as a directors salary and thats tax free.

That other income £38k is charged then at 19%.

When its the next financial year, when I take my £12k out again tax free, that money from the previous year was tax 19% so its just held in that ltd account is that correct? Sounds like its best to just take it all out before it get CP taxed.

2. To add, on companyhouse.gov can you see what a directors salay have they took.

Sandtree

The £50k cannot be "profit" if its before you draw salary.

Any residual profits will sit in the company and won't attract further corporation tax... if you get interest etc then that would be taxed. 

I'd suggest that you book a session with an accountant to do some worked examples... most will offer a 30 minute free session and just explain you are struggling to work out if its financially sensible to incorporate or remain a sole trader.

pphillips

Poshsalt said:

Self employed tax assessment Personal Allowance £12,5k then £12,571 to £50,270 20%

Starting a limited business, Company Tax is 19%

So on all profits that come into the business I have to pay 19%.

So lets say I made £50k profit, I first pay 19% from the profits. Leaving £40,500.

Then with the directors salary I take £12,5 (tax free) and £2k dividend out (tax free), then £35,500 dividend @7.5%

With tax liability on the £50k being £3,500, paying 7% tax rate.

So taxs on the  £50,000 would be £9,500 + £3,500 = £13,000. (not including NI)

Would you say this is correct? If so wouldnt it be better off being self employed.

That's not correct, 19% corporation tax is paid after deducting the director's salary.
But in your example you are better off being self employed because of the large dividend payments, which are effectively being taxed twice.

pphillips

Poshsalt said:

Thanks for you replies.

I do have another  question, to try keep it simple.

Lets say the £50k comes in profit, I take £12k out as a directors salary and thats tax free.

That other income £38k is charged then at 19%.

When its the next financial year, when I take my £12k out again tax free, that money from the previous year was tax 19% so its just held in that ltd account is that correct? Sounds like its best to just take it all out before it get CP taxed.

2. To add, on companyhouse.gov can you see what a directors salay have they took.

1. Yes, that's because corporation tax is based on retained profits. But if you're a higher rate taxpayer it will make more financial sense to pay dividends.
2. I think that depends on the type of accounts that your company has to provide.