Is corporation tax computed on profits before or after dividends paid.?

Question

I am completing my first years corp. tax return. After my earnings of £30k I made £12800 profit so I paid myself a dividend of £11k.
Is my CT based on £12800 or £1800 and would I have been better off to have taken the £11000 as a salary rather than a dividend.

Answer 1

Firstly a company does not make earnings, it has a turnover from which expenses are deducted to arrive at the net profit in line with UK GAAP. The net profit is then adjusted in line with the Taxes Acts.

If you have to ask what figure to put in the CT return, then I'm guessing that you have not had accounts properly prepared. If you had, then your accountant/tax adviser would have provided you with a CT computation and/or completed the return on the company's behalf.

Calculate the CT due on the £12,800. Dividends are not revenue expenses, but a distribution of profit after tax.

Has the profit been adjusted in line with UK tax law? Have taken advantage of reliefs available to the company? If you aren't sure, I'd recommend that book an appointment with an accountant ASAP to get your accounts corrected.

Remember, taxes aren't easy. It takes a tax inspector between 4-7 years to be fully trained in corporation tax and for good reason! Companies must submit a CT600, a tax computuation (including capital gains and capital allowances - if any) and a copy of the company accounts.

Answer 2

I would second the advice to see an accountant as from your figures there may be a problem.

The basic answer to your question is that CT is based on the £12,800 (adjusted as necessary)

If you are going it alone the first thing is to make sure the accounts are presented correctly. E.g. the dividend will not appear in the Profit and Loss Account. This is because it must be shown as an allocation of reserves and it is here that the problem may arise.

Tax on £12,800 would be about £2,400. The profit after tax is therefore about £10,400. As this is your first year there would not be any accumulated reserves brought forward so the total standing to the credit of the Profit and Loss Account would be £10,400. You have now distributed £11,000, which is £600 more than the company had available. This makes the dividend an illegal payment.

It has been known for the Revenue to seek to tax these "illegal" payments as salary instead of dividend. This will cost in extra national insurance contributions.

To avoid this make sure your documentation is clear. What calculations did you do before deciding to pay the dividend? What do the minutes of the directors' meeting say? You must have a written record of this sort of resolution even if you are the only director.

Should you have paid additional salary instead of dividend? Probably not as the salary would incur NIC and the company's contribution does not reduce at higher levels.

You need to do the sums. Don't forget that the dividend will be treated as a gross payment of £12,222 (with a tax credit of £1,222) for the purposes of your own tax return.

Answer 3

Are Dividends Paid After Tax