Chapter 17: Tax planning (Task 9)

Question 1

Things to consider for profit extraction

Answer 1

Salaries are taxed at higher rates of income tax than dividends

Employee’s and Employer’s NI will be payable on salaries, whereas no national insurance is payable for dividends

Dividends must be paid out of retained earnings - meaning there may be insufficient profits to pay the level of desired dividends

Dividends are not an allowable deduction for corporation tax purposes

Salaries are an allowable deduction for corp tax purposes, so the net gross to the company is gross salary plus employer’s NI less corporation tax saving at 19%.

Question 2

NI payable on salaries and dividends

Answer 2

Employee’s and Employer’s NI will be payable on salaries, whereas no national insurance is payable for dividends

Question 3

Tax Planning for spouses / civil partners

Income tax considerations

Answer 3

• Are both individuals making full use of their personal allowance

-Does on spouse/civil partner pay tax at a higher rate than the other

-Could an income-generating asset (shares or partnership stake) be transferred to a spouse/civil partner who will pay the least amount of tax

Question 4

Tax Planning for spouses / civil partners

Capital Gains Tax considerations

Answer 4

• Are both individuals using full use of their annual exemption ?

-Does one pay tax at a higher rate?

-Transfer on a nil gain nil loss basis

-Future planning - would both individuals be entitled to business asset disposal relief?