TE writes: Several years ago I was advised to amalgamate my self-employed
business with my existing trading company. I own 90% of the company and my
daughter owns the other 10%. I now wish to withdraw a large amount from the
business and am told I will have to pay 32.5% tax on the dividends on top of
the 30% corporation tax. I feel I would have been better off staying as
self-employed, but is there any way I can reduce the tax?
The move from self-employment to the company could have reduced and deferred
tax at the time, writes Jon Sutcliffe, partner at Kingston Smith LLP. As a
self-employed business, the marginal rate of tax on profits is likely to be
41% (including National Insurance).
As a company, the corporation tax and higher-rate tax on dividends could have
been similar, assuming you paid corporation tax at the small-companies rate.
The higher-rate tax is deferred until the amounts are later withdrawn as
dividends. However, your company is paying corporation tax at the
large-companies rate.
The higher-rate tax on dividend income is 32.5%, but there is an associated
tax credit that reduces the tax payable by you on the dividend to 25% of the
amount received. The full rate of corporation tax has been reduced from 30%
to 28%, so for 2008-9, the effective total tax on the dividend is 46%, and
would be 40.75% if the company paid the small-companies corporation-tax
rate. You have also had the benefit of deferring the higher-rate tax from
the year the profit was made until the year you draw the dividends. There
may have been many other reasons for amalgamating the businesses.
Depending on how much money you want to take out, you could consider
structuring the withdrawal of the money as a purchase of your 90% interest
by your daughter, who owns the other 10% of the firm. This could allow the
amount to be treated as capital and hence taxed at a maximum of 18%, and
possibly less depending on the tax base cost of your shares and any
entrepreneur’s relief available. There is, however, much anti-avoidance
legislation in this area, so take professional advice.
CHANGING LAW ON STAFF HOLIDAYS
SB writes: I hear there have been changes to the law on holiday entitlement
and want to know exactly what my workers are entitled to. What are the
changes?
All workers are entitled to holiday leave from their first day on the job,
writes Peter Done, managing director of Peninsula. The entitlement is 4.8
weeks annually, with part-timers getting the same pro rata.
A week’s holiday pay is calculated according to the type of work performed:
- for workers on fixed hours and pay, it equals the amount due for a normal
week’s work;
- for workers on variable hours and pay, a week’s pay is based on the average
earnings over the previous 12 weeks.
When Christmas and New Year public holidays fall at a weekend, other weekdays
are declared public holidays. Legally, paid time off does not have to be
given for public holidays, but you can include this within your workers’
minimum leave entitlement if you want.
From October 2007 the entitlement increased to 4.8 times the usual working
week and from April 2009 it will change to 5.6 times the usual working week
for holiday years starting on or after this date.
By law you must set out leave and holiday-pay entitlements within your
workers’ written statement of employment. This will allow them to work out
their own entitlement.
When people leave, or if they have been dismissed, they are entitled to be
paid for any holiday they have accrued but not taken.
Kingston Smith LLP, the chartered accountant, and Peninsula, the
employment-law firm, can advise owner-managers on their problems. Send
questions to The Business Doctor, The Sunday Times, 1 Pennington Street,
London E98 1ST, or fax to 020 7782 5765. Advice is given without legal
responsibility. bizdoc@kingstonsmith.co.uk
