1. How the owners of the limited company can withdraw money for personal use ?
This is the case of two associates who want to start a small construction business.
They`ve asked me and i just want to make sure how this works. I know that for self employed it is just drawings but I am not familiar with ltd companies.
2. If they choose to start the business as partnership. Will the amount of personal allowance gets double ? (e..g 9440 X 2 = 18,880 )
Or they will share the taxable profit as they wish (eg 50:50) and than apply for each of them the personal allowance ?
Thank you !
Have a lovely evening.
Adrian
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This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
You'd need to setup a payroll for the ltd company and for the partnership they would have a partnership agreement for the profit split. They would each have a personal allowance but this would in no way be merged with one another.
In my experience - if Directors want to take money out of their own business, the withdrawals will be put to 'Dividends' then the Accountant ties up the lose ends at the end of year with issuing the dividend tax certificates etc. The company should be making profit in order for this to work this way.
Directors are also often 'encouraged' to take a small wage as an employee - i.e. around £600 per month, this gives them their full tax allowance and their NI credits without actually paying any tax or NI - they can then transfer this £600 each month to their personal bank accounts in addition to any dividend withdrawals that they take.
If a partnership exists - the profits of the business are split according to the 'partnership agreement' - if no agreement exists, then it is assumed this will be 50/50 with 2 partners and yes, you are correct, each partner will be entitled to his full tax allowance prior to their share of the profit being taxed as long as this tax allowance hasn't been used elsewhere.
Hope this helps
Carol
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Carol Saunders Lady of Ledger Book Keeping Telford, Shropshire
Whilst I could answer directly the question asked I'm thinking that maybe you need to take a step back.
Do you really feel comfortable advising these people of their options in order for them to eastablish their business?
If you are asking questions such as these then if you make a mistake in your advice (which seems likely) then your PII is unlikely to be suportive in the event of this going litigous.
Do you think that maybe it would be better to advise them to see an accountant to set the business up and then you look after the bookkeeping of the business going forwards? Are you not advising that route as you fear losing the client all together?
For info the directors would be employee's of the company and would be paid a salary under standard PAYE, plus possibly Dividend. There are also Expenses and Pension arrangements to consider.
A partnership is simply a collection of self employed individuals. It is not processed the way that you are suggesting.
Have you considered CIS implications? Have you considered LLP rather than Partnership? How do you know that the advice that you are giving is the best for the client?
As I say, get them to go see an accountant.
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.
we crossed in the post, definitely took different approaches on that answer.
Just to add to your answer. You use the word should in relation to Dividends only being against profit.
Could I just add to that for other readers benefit that Dividends can only be taken against profits or retained profit brought forwards.
On the Partnership part of the question I fear that Adrian did litterally mean doubling the allowance treating the partnership as a single entity rather than each partner having their own allowance.
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.
Dear Shaun,
This is not my bread. Just trying to help some guys with some general tax advice as they do not afford to hire an experienced accountant.
If I am allowed another question as I did not quite get it from my AAT studies.
If a person earns £ 9540 as dividends from his own company and this is the only income he has.
I will take out the Personal allowance £ 9440 so he only has £ 100 to pay tax for.
He gets taxed 100 X 20 % at small profits rate (under 300 k) . So he has £80 left.
Than the dividends from his own company will represent 1"non savings income" or 2 "dividend income" ?
for the calculation of his Personal Tax ?
1. As non savings income is taxed first and in three bands 20 % 40 % 50 %
in this scenario he gets taxed £ 80 X 20 % = £ 16, So. in the end he gets 80 -16 = £ 64 + personal all
and
2. As Dividend income is taxed last with 10 % 32.5 % or3 42.5 %. depending on tax band.
so, 80 X 10 % = £8 so, in the end he gets 80 - 8 = £ 72 + personal all
Thank you !
Adrian
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This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
Hi Adrian,
I think you are getting a little confused as the company will get charged corporation tax on the profits before dividends are taken out. If the shareholder then receives a dividend that once is grossed up by 10% (it comes with a tax credit of 10%) and added to any other incomne received and this total amount does not exceed the basic rate of tax band then the individual will have no further tax to pay.
lets assume that the taxable profits for the company was £10,000. And the shareholder (100% holding for simplicity) had no other income other than dividends from the company. The company would have corporation tax at 20% levied on the profits, i.e. £2000. This leaves £8000 to distribute via dividends and the shareholder would have no tax or NI to pay on this. If the shareholder also had a paye job earning say £20,000 and all taxes had been paid, then the shareholder would still have no tax. Of course if he had a job paying £40k then his dividends would all be in the higher tax band and tax would be applied on the dividends via his self assessment.
Coming back to the original example though where the company had profits of £10k, in reality the shareholder/director is likely to take a salary of £641 per month to use up most of the personal allowance and not to incur either employers or employees NI (and still be credited with NI contributions for state pensions purposes). This would be a salary of £7,692 and would leave the company with a taxable profit of £2,308(£10k -7692). The corporation tax would now be just £461.60 and the dividend that could be distributed £1846 and so you can see that there are really large tax efficiencies to be had by structuring things properly.
In order to have the full picture, I really appreciate your confirmation please. And sorry for asking so many questions.
RobH wrote:
Morning Adrian,
lets assume that the taxable profits for the company was £10,000. And the shareholder (100% holding for simplicity) had no other income other than dividends from the company. The company would have corporation tax at 20% levied on the profits, i.e. £2000. This leaves £8000 to distribute via dividends and the shareholder would have no tax or NI to pay on this.
If the shareholder also had a paye job earning say £20,000 and all taxes had been paid, then the shareholder would still have no tax.
Of course if he had a job paying £40k then his dividends would all be in the higher tax band and tax would be applied on the dividends via his self assessment.
Coming back to the original example though where the company had profits of £10k, in reality the shareholder/director is likely to take a salary of £641 per month to use up most of the personal allowance and not to incur either employers or employees NI (and still be credited with NI contributions for state pensions purposes).
1. Is there any way that I can calculate the value of the state pension ?
I know that basic state pension is £ 110.15 /week, but I do not have other details
This would be a salary of £7,692 and would leave the company with a taxable profit of £2,308(£10k -7692).
2.I am not sure I`ve done the calculation right
£148 per week X 52 weeks = £ 7696 Employers NI
£149 X 52 weeks = £ 7748 Employees NI
The corporation tax would now be just £461.60 and the dividend that could be distributed £1846 and so you can see that there are really large tax efficiencies to be had by structuring things properly.
3. Could you please advise if the following calculation is right.
He has to pay:
a. corporation tax as calculated above £ 461.60
b. personal tax when when doing his self assessment as calculated below £ 19.60
Income from employment £ 7692
Personal all (£ 7692)
Dividend Income £ 1846
Personal allowance left (£ 1748)
= Taxable £ 98
£98 X 10 % basic rate band for dividends = £ 9.8
TOTAL Corporation tax 461.60 + Personal tax done by self assessment 9.8 = £ 471.40
(Major tax savings between first and second scenario of 2000 - 471.40 = £ 1528.86 )
4. In calculating the personal tax / self assessment of a one owner ltd company is there any difference on the dividends from his own company and the dividends received from other companies ?
This is a great help for me and I want to thank you very much.
Kind regards,
Adrian
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This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
Dear Shaun, This is not my bread. Just trying to help some guys with some general tax advice as they do not afford to hire an experienced accountant.
How did they get the impression that you were the person to ask for tax advice?
Are you being paid for your advice?
Do you realise that even the person down the pub giving incorrect advice for no charge can be sued for such let alone someone who the recipient of the advice believes to have an accountancy qualification.
You have to be really careful as although the AAT do allow students to trade before MAAT status provided that one makes no mention of AAT there is a get out clause that can cost you your membership (and be charged for the privelage of losing it) in that no member (including student members) should offer any service that they are not qualified and / or experienced to offer (thats from memory not from their site so you would need to visit your terms and conditions of membership for the actual wording).
Do you remember this thread where we spoke about enhancing your tax knowledge :
I still advise that you buy the latest version of Melville and the BPP I-Learn course for ACCA paper F6 or P6 and work through all questions in both the book and the course.
It will get you through your AAT business tax exam and give you sound foundations upon which to be able to speak on tax matters with confidence.
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's my turn to be a bit confused now. I'm not sure why in point 1 you are trying to calculate the state pension, my point was that it is a good way for directors to be paid in order to qualify for state pension in the future without actually having to make the NI contribution. So in your point 2 the salary if paid £148/week (£641/month) would mean no NI is payable.
Point 3, the ct I calculated was based on profits of £10k less the salary. As explained before there would be no further personal tax on the dividend in that situation. You are very muddled in your understanding of how tax work and I think you need to go back to basics with how a company gets taxed and how an individual gets taxed.
Yes, I definitely need to do my homework, but sometimes I do not understand fully whats on the books so I am asking the experienced people around here.
I want to thank you very much for your help.
Have a nice evening.
Adrian
__________________
This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
