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taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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We are trying to work out if we should register a UK

Resolved Question:

Hi.
We are trying to work out if we should register a UK company as an LTD or an LLP. We understand the working of an LTD but have never had any association of working under an LLP and so wanted to ask a couple of questions regarding it.
In an Ltd, if the company makes £1mill profit in a year, the company is charged corp tax (lets use the 20% rate). This means that the company is left with £800k to either re invest or to pay out to its shareholders. The shareholders then have to pay income tax on anything pulled out of that £800k, which means than if your intention is to pull all of the money out, you could end up paying 60% tax as it it taxed on both the company level and the shareholders level.
It appears that an LLP works in the way that there is no corp tax and that each partner is treated as self employed and therefore if the company makes £1m profit between 2 partners, then each partner gets £500k and has to pay income tax on that allocation.
The first part to this question is are these assumptions roughly correct?
If so, then it would appear if your plan is to withdraw all profits made, then an LLP is the more logical company to form. However if your plan is to reinvest the majority of the funds, then an ltd seems more logical due to the 20% vs 40% tax until reinvested. Is this correct or is it possible to reinvest the funds held by the LLP before it is taxed as personal income therefore making an LLP the more logical choice?
I hope all this made sense.
Submitted: 2 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 2 years ago.

Hello and welcome to the site. Thank you for your question.

Taxation of dividends
You are broadly correct in your statement that the shareholders would potentially end up paying heavy tax on the dividends paid. How much tax you pay depends on the amount of dividend paid as the tax rate is in bands:
- for any dividend income falling below the £31,785 higher rate threshold, there is zero dividend tax to pay (as the 10% tax credit cancels out the 10% tax rate).
- for higher rate dividend income (between £31,786 and £150,000), you pay 25%(the effective rate).

- for additional rate income, your effective rate is 30.56%
.

More information on dividend tax is covered here

http://www.companybug.com/guide-to-dividends/

Taxation of profits
As you have stated LLP profits are subject to income tax and not corporation tax.
You would not only pay IT but also Class 4 NI.
Any income over £150k would be taxed at 45%.
Also share of profits over £42,385 would attract Class 4 NI at 2%. Profits between £8,060 and £42,385 attract Class 4 at 9%.

Reinvestment into the business would entitle you to claim capital allowances on those assets acquired based on type of asset. More information on this subject can be found here
https://www.gov.uk/business-tax/capital-allowances https://www.gov.uk/business-tax/capital-allowances

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

taxadvisor.uk and other Tax Specialists are ready to help you
Expert:  taxadvisor.uk replied 2 years ago.

Hello

I notice you have viewed my response to your question about registering the comany as LTD or LLP and tax implications (</spanCustomerLast Viewed on 07/05/2015 at 14:00).

Just checking to see if you have any issues relating to your question that I may not have addressed.


Please let me know if I can be of further assistance.