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Ask Your Own Question, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 5147
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
Type Your Tax Question Here... is online now

I have just started a business. I am trying to work out best

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I have just started a business. I am trying to work out best way to pay myself, with minimal tax. I have been told pay myself the miniumum possible as a wage, and draw the rest as dividend. So if i pay myself say £700 per month, i wont be taxed on that as its with in the allowance.
Then, say the company makes a £50000 profit:
For a UK limited company, i understand that corporation tax is paid on any profits. Is there a threshold for this? For instance a 20% for every pound over £25k for example... Or is it paid on every penny of profit.
If i have 100% off the remianing dividend after tax is paid, how much will i get and how is it taxed?
Is this the best way?
Hello and welcome to the site. Thank you for your question.

There are changes to how dividends paid would be taxed wef 6 Apr 2016.

I will revert to you shortly with some calculations.

Many thanks

Asad, thank you for your patience.

Here is my answer ...

Personal income tax

You can draw a salary of £880 per month (£10,560 pa) and there will be no income tax payable as it is covered by your personal allowance. On the other hand, if you were to draw a salary of up to £8,059 there will be no Income tax/NI payable.

Annual earnings between £8,060-£42,380 would attract employee’s NI at the rate of 12%.

Company corporation tax

Company pays corporation tax at the rate of 20% on all profits to £300,000.

Calculation of net income after tax based on current year tax rates

Company profit after salary of say £8,050 = £50,000

Corporation tax payable (50,000 x 20%) = £10,000

Company profits after tax (50,000-10,000) = £40,000

Dividends paid = £40,000

Retained profits = nil

Personal tax position

Salary = £8,050

Dividends paid (40,000+tax credit 4,444) = £44,444

Total income = £52,494

Personal allowance = £10,600

Taxable income = £41,894

Tax payable = £2,019

Net income after all taxes (8,050+40,000)-2,019 = £46,031

Changes from 6 Apr 2016

Some of the key changes that will impact small businesses in particular are set out below:

Taxation of dividend income from April 2016

The present 10% dividend tax credit is being abolished from April 2016. In its place an annual dividend tax allowance of £5,000 is being introduced. Dividends received will be free of further charge to Income Tax up to this limit. Above the £5,000 limit dividend income will be taxed as follows:

Basic rate tax payers at 7.5%

Higher rate (40%) tax payers at 32.5%, and

Additional rate (45%) tax payers at 38.1%

Shareholder directors of small companies that pay limited salaries and high dividends may be affected by this change and should review their dividend strategy.

National Insurance Employment Allowance

From April 2016 the present £2,000 allowance is being increased by 50% to £3,000. The Chancellor has also announced that the allowance will be withdrawn for one person shareholder/employee companies.

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.

Customer: replied 2 years ago.

Thanks... Okay, so lets say end of march next year. I have 50k in profit.

Do i physically give the £10k to hmrc for corporation tax. Then a seperate department deals with my tax i'd have to then pay £2019.

Is there any other simple tax savings the company or i can make?

Customer: replied 2 years ago.

Also sorry, if i am working from home as my office, can i claim back any portion of the rent/utility bills as over heads to bring the profit down and tax down?

Asad, thank you for your reply.

Corporation tax and income tax are two separate taxes and yes you would have to pay CT on profits made by the company.

You could start a pension scheme and get your company to make contributions into it. These contributions are tax allowable and will reduce your overall tax bill. You ought to be prepared to sacrifice some dividend and instead have money put into a pension fund.

The alternative would be to run your business as self employed sole trader.. in this case there is only income tax to worry about.

If you are working from home, you can claim expenses for use of home and this would certainlt reduce your profits and tax bill. You have be mindful of the fact that savings are not great . More information on allowable expenses for working from home can be found here

I hope this is helpful and answers your question. and other Tax Specialists are ready to help you
I thank you for accepting my answer.

Best wishes.