This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

Corporation Tax and personal tax

slmonline
Posts:1
Joined:Tue Sep 17, 2019 10:41 pm
Corporation Tax and personal tax

Postby slmonline » Tue Sep 17, 2019 10:47 pm

I wonder if anyone can help me with something that has long confused me.

If I have a limited company, and it makes a profit in year 1 but I decide to leave the profit in the company, then I will only have to pay corporation tax is my understanding. However, if in year 2 I decide that I'd like to remove the profit after corporation tax, I assume I will then also have to pay personal tax on the dividend or salary payment, so in effect the profit has been taxed twice, where if I'd just taken the dividend in year 1 it would only be taxed once.

What am I misunderstanding because this can't be right that profit gets taxed twice. Otherwise nobody would every pay corporation tax, they would always remove all profit from the company each year and only be taxed once.

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Corporation Tax and personal tax

Postby robbob » Wed Sep 18, 2019 8:55 am

If I have a limited company, and it makes a profit in year 1 but I decide to leave the profit in the company, then I will only have to pay corporation tax is my understanding. However, if in year 2 I decide that I'd like to remove the profit after corporation tax, I assume I will then also have to pay personal tax on the dividend or salary payment, so in effect the profit has been taxed twice, where if I'd just taken the dividend in year 1 it would only be taxed once.
Ok first up salary is a business expense and reduces profit subject to tax, so although you may pay tax on salary if it is not covered by your pa you get a similar reduction in corporation tax all other things being equal.

Dividends have nothing to do with corp tax whatsoever and are paid out of post corporation tax retained profits , although you pay both corporation tax and potentially dividend tax on dividends taken thats how it is - but timing of dividend will never affect the corporation tax.

Example with no salary reduce profits by salary drawn if salary is paid.
10k profit
1900 corporation tax paid
8100 retained profit available for dividends - thats the maximum dividends that can be paid roughly speaking presuming no later losses and no earlier retained losses b/f

You will potentially pay 7.5% dividend tax (perosnally) on that £8,100 in the tax year you vote the dividend - which could be the following accounts/tax year.
Note ignoring dividend allowance 7.5% of 8100 is 607.50

Total taxes paid 2507.50 is 25.07 % of profit this is your marginal rate on profits up to higher rate tax personally - still not too bad when compared to 32% tax and ees ni paid by employees and 20%+9% paid by sole traders.
Even better if/when corporation tax reduces to 17% 1/4/2019 - i am guessing this proposed rate cut will be dependent on which party is in power come 1/4/2020!


Return to “Business Tax”