Ltd co trade tax save?

stevo5678stevo5678 Well-KnownCheltenham Registered Posts: 326
Hi everyone.

i don'tknow if i'm going mad but I can't agree a Ltd Co tax saving calculation from an acountancy site.
Here are the results:

Enter your annual profits:

Annual Profits £86,000.00

Self Employed

Tax Payable 24,284.00
National Insurance 4,146.60
Total Payable 28,430.60
Net Spendable Personal Income 57,569.40

Limited Company

Company Tax Payable 15,702.40
Personal Tax Payable 7,830.33
Total Payable 23,532.73
Net Spendable Personal Income 62,467.27
Saving
Saved By Registering As A Limited Company £4,897.87


The bit I can't agree is personal tax payable.

I know all of the £86000 won't be paid out via the co due to the available distributable profits (tax will reduce this) however for the purpose of a taxation comparison surely you need to assume all of the £86000 (less say £7000 for salary and an additional £500 of accountancy costs) will be paid for a comparison. Therefore I work out the personal tax as approx

£86000-7000-500 = 78500 as dividend grossed up by 10/9 = £87,222. (ignore salary and PA as thay will pretty much cancel each other out). So £87,222 taxable.

£35000 @ 10% = £3500, £60,555 (87,222-35000) @ 32.5% = £16972 total = £20,472.
Less 10% tax cr on dividend = 20,472 less £8722 (87222-78500) = total due of £11,750

Another simple way is the £78500 x 10/9 = 87222 less 35000 (all covered by 10% credit for dividends) = 52,222 x 22.5% (3.5% HR div less 10%) = £11,750.

The calculation from the site says personal tax of £7830????

Any ideas as i think this is the second calculator ive used that says there will be a c£5k saving!!

I can only assume that the personal tax is being calculated on the £86000 less corp tax of say £16k = 70000. less 35,000 (basic rate band all covered by the 10% div cr) = 35,000 x 22.5% (32.5-10%) £7875.

This is not a genuine comparison for me as the owner will only be basing the tax on what he pays as distrubutable profits after CT so will have far less income in his hand for a like for like comparison (86000-16,000 = 70000) plus the dividends havent been grossed up?

Please let me know if I am looking at this wrong or missed anything...

Many thanks

Comments

  • stevo5678stevo5678 Well-Known Cheltenham Registered Posts: 326
    On second thoughts maybe I am being stupid.

    Is it just simply the £86000 less CT of £15,700 = 70,300

    Paid as dividend = £70,000 x 10/9 = £77,778

    Less 35,000 covered by 10% so 42,778 x 22.5% = £9625

    Ive done a seperate calc online to confirm this

    Dividend Information
    The gross dividend is £77,777, making your total gross income £84,777
    You are a higher rate tax payer (limit is £34,370). Extra tax is payable on dividends
    £42,298 of your gross dividend income is subject to further tax.
    The extra tax to pay is £9,517 (13.6% of net dividend).
    Band Rate Lower Limit Upper Limit Tax
    basic rate 10% 0 £34,370 0
    higher rate 32.5% £34,370 £150,000 £9,517
    additional rate 42.5% £150,000 - £0
    Total Tax: £9,517


    The original calculator only has £7830, maybe it hasn't grossed up the dividends (EG £70,000 - 35000) = 35,000 x 22.5% = £7875). Or it has taken off the salary for the CT liability (must of as 86000 x 20% is higher than £15,700) and not included salary in the personal tax calc and still applied the PA)

    I know this shouldn't be this difficult :(

    Thanks
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    stevo5678 wrote: »
    Hi everyone.

    i don'tknow if i'm going mad but I can't agree a Ltd Co tax saving calculation from an acountancy site.
    Here are the results:

    Enter your annual profits:

    Annual Profits £86,000.00

    Self Employed

    Tax Payable 24,284.00
    National Insurance 4,146.60
    Total Payable 28,430.60
    Net Spendable Personal Income 57,569.40

    Limited Company

    Company Tax Payable 15,702.40
    Personal Tax Payable 7,830.33
    Total Payable 23,532.73
    Net Spendable Personal Income 62,467.27
    Saving
    Saved By Registering As A Limited Company £4,897.87


    The bit I can't agree is personal tax payable.

    I know all of the £86000 won't be paid out via the co due to the available distributable profits (tax will reduce this) however for the purpose of a taxation comparison surely you need to assume all of the £86000 (less say £7000 for salary and an additional £500 of accountancy costs) will be paid for a comparison. Therefore I work out the personal tax as approx

    £86000-7000-500 = 78500 as dividend grossed up by 10/9 = £87,222. (ignore salary and PA as thay will pretty much cancel each other out). So £87,222 taxable.

    £35000 @ 10% = £3500, £60,555 (87,222-35000) @ 32.5% = £16972 total = £20,472.
    Less 10% tax cr on dividend = 20,472 less £8722 (87222-78500) = total due of £11,750

    Another simple way is the £78500 x 10/9 = 87222 less 35000 (all covered by 10% credit for dividends) = 52,222 x 22.5% (3.5% HR div less 10%) = £11,750.

    The calculation from the site says personal tax of £7830????

    Any ideas as i think this is the second calculator ive used that says there will be a c£5k saving!!

    I can only assume that the personal tax is being calculated on the £86000 less corp tax of say £16k = 70000. less 35,000 (basic rate band all covered by the 10% div cr) = 35,000 x 22.5% (32.5-10%) £7875.

    This is not a genuine comparison for me as the owner will only be basing the tax on what he pays as distrubutable profits after CT so will have far less income in his hand for a like for like comparison (86000-16,000 = 70000) plus the dividends havent been grossed up?

    Please let me know if I am looking at this wrong or missed anything...

    Many thanks

    First we need to calculate the gross dividend as follows:

    1) £86,000 - director's salary (i.e. 624 x 12) = £78,512 (taxable profits)

    2) £78,512 x 20% of corporation tax = £15,702 (corporation tax)

    3) £78,512 - 15,702 = £62,810 (after tax profits)

    4) £62,810 x 100/90 = £69,788 (gross dividend)

    Now we need to calculate personal tax as follows:

    5) £7,488 (director's salary) - 7,488 (personal allowance) = nil

    6) £69,788 (gross dividend) - 617 (unused personal allowance) = £69,171 (taxable income)

    7) First £34,370 is taxed at 10% = £3,437

    8) Remaining £34,801 is taxed at 32.5% = £11,310

    9) Tax liability = £3,437 + 11,310 = £14,747

    10) Tax payable = £14,747 - £6,917 (dividend tax credit) = £7,830


    Acknowledgements:
    ATT
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,038
    stevo5678 wrote: »
    On second thoughts maybe I am being stupid.

    Is it just simply the £86000 less CT of £15,700 = 70,300

    Paid as dividend = £70,000 x 10/9 = £77,778

    Less 35,000 covered by 10% so 42,778 x 22.5% = £9625

    Ive done a seperate calc online to confirm this

    Dividend Information
    The gross dividend is £77,777, making your total gross income £84,777
    You are a higher rate tax payer (limit is £34,370). Extra tax is payable on dividends
    £42,298 of your gross dividend income is subject to further tax.
    The extra tax to pay is £9,517 (13.6% of net dividend).
    Band Rate Lower Limit Upper Limit Tax
    basic rate 10% 0 £34,370 0
    higher rate 32.5% £34,370 £150,000 £9,517
    additional rate 42.5% £150,000 - £0
    Total Tax: £9,517


    The original calculator only has £7830, maybe it hasn't grossed up the dividends (EG £70,000 - 35000) = 35,000 x 22.5% = £7875). Or it has taken off the salary for the CT liability (must of as 86000 x 20% is higher than £15,700) and not included salary in the personal tax calc and still applied the PA)

    I know this shouldn't be this difficult :(

    Thanks

    I think you are having trouble with calculating the gross dividend.

    First take away director's salary from profits and then take off corporation tax; this will give you your net dividend..............
  • stevo5678stevo5678 Well-Known Cheltenham Registered Posts: 326
    Thanks reader Ive made this far more complicated than it deserves lol. That works. I did account for it in my head but was making a mountain from a mole hole with what net dividend will be payable.

    Oh well theres 30 mins wasted!
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