CAP2 Taxation NI - Session 11 - Questions and Solutions
Question 1: Moorhead Electronics Limited – Extracting Cash
Scenario: Mary and Michael Moorhead run Moorhead Electronics Limited as a trading company in the UK.
Mary's Concern: Unsure how to extract cash effectively as remuneration, considering tax implications of salary vs. dividends.
Tax Implications of Salary:
Income Tax: Payable at rates up to 45%.
National Insurance (NIC):
Employee: Class 1 Primary NIC at 8% (drops to 2% above upper earnings limit).
Employer: Class 1 Secondary NIC at 13.8%.
Company Benefit: Total salary cost (including employer's NIC) is a tax-deductible expense.
Tax Implications of Dividends:
Dividend Allowance: The first £500 of dividend income is tax-free.
Income Tax Rates:
Additional rate taxpayers: 39.35%.
Higher rate taxpayers: 33.75%.
Basic rate taxpayers: 8.75%.
National Insurance: No NIC payable by employee or company.
Company Drawback: Dividends are not tax-deductible for corporation tax.
Non-Tax Factors to Consider:
Employment contracts.
Minimum/living wage laws.
Impact on pension relevant earnings.
Social security benefits protection (e.g., State Pension).
Company's distributable reserves sufficiency for dividend payments.
Question 2: Investment Company - Corporation Tax Liability
Accounting Period: 12 months ended 31 March 2025.
Income:
Rental income from unfurnished lettings: £270,200
Bank deposit interest receivable: £2,600
Expenses:
Repairs and insurance of let property: £5,600
Audit fee: £2,000
Directors’ fees, salaries, rent of office, capital allowances on office equipment, stationery, telephone: £150,600 (1/3 for property management, 2/3 for company management)
Chargeable gain on investment property (after indexation allowance): £60,000
Debenture interest paid: £2,000 (Debenture interest payable during the year: £2,400)
Corporation Tax Calculation:
Property income: £214,400
Surplus non-trade loan relationship credits: £200
Chargeable gain: £60,000
Total profits: £274,600
Less: management expenses: £102,400
Taxable total profits: £172,200
Corporation tax @ 25%: £43,050
Surplus Management Expenses:
Excess expenses can be carried forward indefinitely.
Can be surrendered as group relief.
Notes on Calculation:
Property Income: £270,200 (Rental income) - £5,600 (Repairs) - £50,200 (Management) = £214,400
Surplus Non-Trade Loan Relationship Credits: £2,600 (Bank interest) - £2,400 (Debenture interest) = £200
Management Expenses: £100,400 (Director’s fees etc.) + £2,000 (Audit fees) = £102,400
Corporation tax is payable at 25% because the augmented profits of £172,200 exceed the upper limit of £125,000 (£250,000/2).
Question 3: Williams Investments Limited – Taxable Total Profits
Company Type: Investment company (not a close investment holding company).
Accounting Period: 12 months ended 31 March 2025.
Income:
Rental income: £528,000
Interest income on bank deposits: £19,400
Expenditure:
Accountancy fees: £2,800
Director’s remuneration: £15,000
Property maintenance fees: £22,900
Travel expenses: £4,200 (appraising new investment opportunities)
Interest payable on loan to purchase rental properties: £7,800
Share Disposal:
Sold 15% shareholding in an unquoted investment company for £275,000.
Shares cost £98,000 in 2018.
Brought Forward:
Management expenses of £18,725 at 1 April 2024.
Taxable Total Profits (TTP) Calculation:
Taxable Total Profits: £652,975
Notes on Calculation:
Property Income: £528,000 (Rental income) - £22,900 (Property maintenance fees) = £505,100
Non-Trade Loan Relationships: £19,400 (Interest income) - £7,800 (Interest payable) = £11,600
Chargeable Gain: £275,000 (Share disposal proceeds) - £98,000 (Base cost) = £177,000. Substantial shareholdings exemption not available as the company being sold is an investment company.
Management Expenses: £2,800 (Accountancy fees) + £15,000 (Director’s remuneration) + £4,200 (Travel expenses) = £22,000. All expenses are related to managing investments.
Surplus management expenses from 2024 (£18,725) are carried forward and fully deductible.
Question 4: Close Company – Salary vs. Dividend
Scenario: Close company with a single shareholder/director.
Salary: £5,000 per month.
Additional Withdrawal: £20,000 on 31 March 2025.
Options:
Extra salary payment: includes secondary NICs to equal £20,000.
Dividend payment: includes extra corporation tax (compared to salary) to equal £20,000.
Assumptions:
Owner has no other income.
Dividend allowance already used.
Company pays corporation tax at the small profits rate.
Option 1: Salary
Payments made by company: Secondary class 1 NICs @ 13.8%: £2,425
Salary (balance): £17,575
Tax and NIC payable: Primary class 1 NICs @ 2%: £352, Income tax on salary @ 40%: £7,030
Secondary class 1 NICs: £2,425, Corporation tax: £3,800
Total tax payable: £9,807
Disposable income: Gross salary: £17,575, Income tax and primary Class 1 NICs: (£7,382)
Option 2: Dividend
Additional corporation tax: £3,800
Dividend: £16,200
Income tax on dividend @ 33.75%: £5,468
Corporation tax: £3,800
Total tax payable: £9,268
Disposable income: Dividend: £16,200, Income tax: (£5,468)
Analysis
The payment of a dividend to the owner is more tax-efficient than the payment of extra salary.
Question 5: Director's Disposable Income – Salary vs. Dividend Mix
Scenario: M is the only shareholder/director of a company.
Taxable Profit: £38,000 before remuneration.
Options:
Pay out entirely as salary.
Pay a mix: £9,100 salary (no employer NIC) and the remainder as a dividend.
Assumptions:
This is M's only income.
Dividend allowance already used.
Option 1: Salary
*Tax and NIC payable: Income tax @ £34,495- £12,570 x 20%: £4,385
Primary class 1 NICs @ £34,495 - £12,570 x 8%: £1,754
secondary class 1 NICs £38,000 - £9,100 x 13.8%: £3,505
Dispossable income with tax:
£34,495 - £6,139= £28,356
Option 2: Dividend
Less: £23,409 x 8.75%: £2,048
Corporation tax at: £ 28,900 8.75 %
Disposable income with tax:
9,100
Dividends;£23,409
23,409-£1,754= £21,655
Final disposable Income £30,755
Analysis
The payment mainly of a dividend plus minimum salary to the owner is more tax-efficient than the payment of a full extra salary..