Joe is the managing director and 100% shareholder of OK-Joe Ltd. He has always withdrawn the entire profits of the company as director’s remuneration, but given a recent increase in profitability he wants to know whether this basis of extracting the profits is beneficial.
For the year ended 5 April 2016, OK-Joe Ltd’s taxable total profits, before taking account of director’s remuneration, are £65,000. After allowing for employer’s class 1 national insurance contributions (NIC) of £5,141, Joe’s gross director’s remuneration is £59,859.
The figure for employer’s NIC of £5,141 is after deducting the £2,000 employment allowance.
Required:
Calculate the overall saving of tax and NIC for the year ended 5 April 2016 if Joe had instead paid himself gross director’s remuneration of £8,000 and net dividends of £45,600.
Notes:
1. You are expected to calculate the income tax payable by Joe, the class 1 NIC payable by both Joe and
OK-Joe Ltd, and the corporation tax liability of OK-Joe Ltd for the year ended 5 April 2016.
2. You should assume that the rate of corporation tax remains unchanged.
Joe
Profits withdrawn entirely as director’s remuneration
(1) Joe’s income tax liability 2015–16:
(2) Joe’s employee class 1 national insurance contributions (NIC) for 2015–16 are £4,468 (((42,385 – 8,060) at 12%) + (59,859 – 42,385) at 2%)).
(3) There is no corporation tax liability for OK-Joe Ltd as the profits are entirely withdrawn as director’s remuneration.
Profits withdrawn as a mix of director’s remuneration and dividends
(1) Joe’s income tax liability 2015–16:
(2) There will be no class 1 NIC for either Joe or OK-Joe Ltd as the earnings of £8,000 are below the NIC lower thresholds.
(3) OK-Joe Ltd corporation tax liability for the year ended 5 April 2016:
