I am the director of my limited company which has no other employees. I recently started a permanent job but still have money in the company which I plan to leave in the company in case I return to using the company at any time. I am looking to do a postgrad university course and to use money in my company's bank account to pay for it. As I cannot claim the postgrad course as a company expense, I believe the only way to get the money from my company to pay for the course is to draw it as a dividend. If I draw a dividend I pay PAYE on that. I believe this will cost me the below amount:
The total amount I need for the university course is £5240 pounds.
The PAYE I'll have to pay on this (being a higher rate taxpayer and taking the 10% concession HMRC give on dividend payments) comes to £1310.
The corporation tax my company will need to pay on the net amount of £5240 I receive is £1392.91 ((£5240/.79)-5240).
The total extra paid by company and myself to realise £5240 is therefore £2702.91.
Is there another way to do this without incurring PAYE? Perhaps one can claim a capital allowance for it?
I would say that if the dividend option is open to you then that is the best alternative (if you come under IR35, if the company has not made a profit or if there are prior charges on the money then it might not be an alternative for you).
The thing about a Uni course is that it's for the benefit of yourself, not the company (and never forget that you have a fiduciary duty of care for the company not dissimilar to a parents duty of care for a child). The only time that is allowable is where learning is required for the continuation of the business such as required CPD or a course that you legally need to attend in order to continue your trade.
It's not even permissible where you are learning something in order to change the direction of the company until that direction has already been changed and you are trading in the new direction.
Good luck with the course. To my mind you are already going down the optimal route if that (as detailed above) is actually permissible.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
It seems to me you're not really doing anything different than you would be already - maximising dividends and minimising salary.
Not sure how you arrived at £1310 but a Dividend is taxed under your personal self assessment, not PAYE and subject to 32.5% as a higher rate payer.
What you say shows how high tax rates are generally. As you're just starting a permanent job, there is little prospect of your income falling out of 40%, nor can you control any longer how you receive your income.
What is the Director's Loan Account position? In fact, it might be more cost effective to take a loan from a high street bank. Are there any residual profits from earlier years, that have already been taxed? Hopefully the small companies CT rate will continue to fall.
Although this does not quite fit what you are going to do - you may find this interesting reading: http://www.hmrc.gov.uk/manuals/eimanual/EIM06236.htm
I was going to comment that I had heard before of businesses, particularly Law Firms, that sponsor students through university courses. They pay the fees and retain the student to work over the holidays and offer a guaranteed position on completion. I imagine course relevance would come into it. It would actually be getting a tax deduction for you to study!
I've not experienced this in practice but it is worth looking into in more detail.
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Thanks for the response Don Tax and others. Don Tax, although the higher tax rate is 32.5 percent, if you receive a dividend and you declare it in your self assessment it gets taxed as the higher tax rate minus 10 percent. This is 22.5 percent, but it is applied to what they term the "gross dividend" amount which is calculated by multiplying the net dividend by 10/9. The final calculation is therefore:
5240 * 10/9 * 22.5%
Anyway, this is my complete novice's understanding of it.
Regarding Director's loan - there was never one made.
I am interested in 2 things you mention:
1. The high street bank loan option. Would this be done through the company? If so, how?
2. You mention residual profits. There are none as it's my first year of trading. Could they have been of use? Also, one thing that's unclear in my mind not having ever experienced year end accounts. At the end of the year I'll have the remaining money in my company. As I have nothing I can use to reduce my profits liable for tax, I'll pay tax on the full amount. I'm not worried about that, my question is just do I then pay myself a salary from the residual profits in future, thereby getting taxed twice? I'm sure it's not the case but if someone could clarify I'd appreciate it.
The bank is likely to loan to you but not likely to loan to the company on the basis of a university course for the owner and if you borrow for some other reason but don't spend it on the other asset then such is fraud (see footnote below).
By residual profit I mean that dividends are only payable from profit, if you haven't made a profit you can't pay a dividend.
You pay your salary from the company and the company doesn't pay tax on that, you do (well, except for employers N.I. that they might as well call tax anyway!).
If there is money left in the company after everything including salary then a dividend would be the optimum way to withdraw it (provided that you do not come under IR35 legislation and then the only dividend available wouyld be from the 5% of turnover left after deducting all other expenses such as accountants fee's).
kind regards,
Shaun.
Footnote :
I was having this debate with a bank manager the other day (proper debate, not an arguement).
If you want to borrow £25,000 for a new car then the bank can't throw money at you fast enough even though the car depreciates to worthless in no time.
If you want to borrow £10,000 to improve your company with the potential to multiply the investment then you have to jump through burning hoops including business plans with five or ten year projections.
Really not joined up thinking at all when it comes to bank loans. The discussion ended up that the bank manager said that if you want to borrow so little money then do it yourself rather than through the company as it's much less grief and no additional risk as even through the company they would still want personal guarantee's for the money effectively lifting the veil of incorporation.
On the fraud note, if the bank believes that you have spent their money on something other than the asset you took it out for they will call in the loan and interest with immediate effect. Also note that with company loans unlike personal often (but not always) the full amount of interest is added at the outset of the loan rather than calculated as the loan progresses.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I haven't had chance to check your explanation of tax on dividends but your thread is really interesting. My suggestion 2. has though fallen on stoney ground but hopefully Frauke's idea can be put to use.
1. Re. high street bank, I don't think they'd be keen on lending to a dormant company without some pretty solid guarantees. (Ahh just got back. thanks Shaun).
There is no BIK tax or interest on a company loan to a director providing the balance stays below £5000. Also, I believe this can remain on the books until you re-activate the company. My knowledge is being stretched but I think S419 tax only kicks in at loans over £15000 until it is repaid. The official interest rate is 4% for loans over £5000.
It's cheaper to pay interest on a loan than to take a dividend.
2. I didn't know you had traded for a year, so there will be no profits brought forward. Salary's are deducted to arrive at the profits chargeable to Corporation Tax.
regards,
Tim
-- Edited by Don Tax on Thursday 8th of September 2011 05:00:58 PM
"Where on the other hand an employee or director of a company, on whom the expenditure is incurred, has a significant proprietary stake in the business or is a relative of those who do, there is obviously a much greater chance that expenditure may have been incurred not, or not wholly, for business purposes but to provide the employee with some personal benefit. If that is the case then the expenditure is not deductible - the business purpose has to be the exclusive purpose. To take an extreme example, there could be no allowance for the educational costs of the business proprietor's son who is employed in the business during university holidays. In such cases it is often helpful to ask whether the expenditure would have been incurred on an otherwise unconnected employee doing the same job."
It also comes up in the Capital v Revenue Expenditure Toolkit (section 8), whereby some training costs, may be a capital expense rather than a revenue expense, and will not be deductible.
The link I put up goes to current information about the the application of Section 776 IT(TOI)A 2005 (Section 331 ICTA 1988) which specifically excludes the course fees, but does allow travel, & living etc expenses. The amounts are currently £15kpa or £1,250pm
I like to use the word "bursary" for the amount which can be paid/received tax free. This is for students who are either sponsored by their employers to undertake full time higher educational course or were on sandwich courses under the terms of which they are required to work for the employer during vacations and at other times
-- Edited by YLB-HO on Thursday 8th of September 2011 07:09:03 PM
