UK Corporation tax, drawings & income tax

[gwhelan100]

Hi all. I'm looking for some clarity on a scenario I've been asked about by a friend. Although I'm a Management Accountant I have never worked in private practice and don't really have any experience of the correct treatment of corporation tax etc

Essentially my friend has a small business in its first year of trading - set up to use sporadically outside of his day job. His income from this is approx £5k. He wants to ensure he pays the correct tax and declare everything etc. My understanding is that he must pay 20% of his taxable profit as corporation tax. He has minimal expenses and so his taxable profit is nearly the whole 5k.

He is happy to pay the tax that is due. He then wants to withdraw the remaining balance into his personal bank account (as drawings). My question is - does he then declare those drawings on his personal tax return? So in effect he is paying the CT and then the income tax/NI on his personal return?

 

[Becky]

You are right that corporation tax is due on the taxable profit. The right treatment of his income from the company would depend on how he takes the money out of the company though: 'Drawings' only apply to unincorporated businesses - he will either be withdrawing the money as a salary or dividends. Salary would have to be processed through the company's payroll and subject to PAYE/NICs, whereas dividends are paid to him without deductions. If he already files a tax return, then either option would need to be recorded, but no further tax would be due on salary income (assuming the correct deductions have been made). Dividends always need to be recorded on a tax return, so if he wasn't required to submit a tax return before then he would now need to submit one to record dividends and pay any tax due on them.

 

[gwhelan100]

Becky - thank you for your reply, much appreciated

 

[snservices]

As Becky said, but remember as from 6th April there is a tax free allowance of £5,000 for dividends so if he earns as you say £5,000 of profit he will not have an additional tax to pay

 

[abhay3214]

thank you for giving a good knowledge