j
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Penguins are very misunderstood!
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Post by j on Mar 5, 2014 13:51:47 GMT
I'm no accountant but as far as I understand it the efficiency of lending through a company really doesn't come through taking dividends since you pay 20% corp tax and then 10%/32.5%/37.5% on the dividends which is an effective tax rate of 28%/46%/50%. The clear advantages are the ability to offset losses vs. interest (reducing profit) and then pay another proportion into an SSAS (up to £40k) to reduce the profit again, minimizing taxable profit. If you are a 20% or lower taxpayer then its marginal whether setting up a company is worthwhile (especially net of accounting costs etc). If you are a 40% or higher taxpayer, then setting up a company and SSAS can increase your return substantially. For example a 40% taxpayer investing in 10% yielding loans with a default rate of 5%/annum and recovery rate of 50% could see a 70% uplift in return by using a combination of company and SSAS. Without a company, higher rate or additional rate taxpayers really have to focus on high recovery (tangible assets, low LTV) loans or those platforms with provision funds. Having looked up SSAS on wiki, it sounds very interesting & worthwhile for those with bug enough funds to make it all worthwhile. Our tax system must be one of the most complicated minefields there is!
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pikestaff
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Post by pikestaff on Mar 5, 2014 14:42:34 GMT
>>>You do not pay tax twice on dividends, you get a tax credit covering the basic rate of tax when you pay a dividend on taxed funds. talk me through this with a worked example Ltd company invests £1000 with p2p firm, at year end gets £100 interest (say) The £100 is profit is then taxed at 20% (corporation tax) so becomes £80 The director then draws that £80 as dividends The director then declares that £80 as income - then is taxed basic/high rate on that income. If you are saying that that the director don't pay personal tax on dividends based on taxed p2p interest then i guess i have been badly advised thanks jack The dividend is taxable but it comes with a non-refundable tax credit, the effect of which is that: - A 0% taxpayer loses out because they cannot reclaim the credit. - A 20% taxpayer pays no further tax. Effective tax rate 20%. - a 40% taxpayer pays additional tax topping up the effective rate to 40% (ie additional tax of £20 in your example). - a 45% taxpayer pays additional tax topping up the effective rate to 45% (ie additional tax of £25 in your example).
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pikestaff
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Post by pikestaff on Mar 5, 2014 14:53:07 GMT
I'm no accountant but as far as I understand it the efficiency of lending through a company really doesn't come through taking dividends since you pay 20% corp tax and then 10%/32.5%/37.5% on the dividends which is an effective tax rate of 28%/46%/50%. ... If you are a 20% or lower taxpayer then its marginal whether setting up a company is worthwhile (especially net of accounting costs etc). If you are a 40% or higher taxpayer, then setting up a company and SSAS can increase your return substantially. For example a 40% taxpayer investing in 10% yielding loans with a default rate of 5%/annum and recovery rate of 50% could see a 70% uplift in return by using a combination of company and SSAS. Without a company, higher rate or additional rate taxpayers really have to focus on high recovery (tangible assets, low LTV) loans or those platforms with provision funds. Wrong re tax on dividends - see my post of a couple of minutes ago. It's an easy mistake to make because HMRC makes it look much more complicated than it really is. I will add a worked example in a later post, once I've done it. Strongly agree re your 2nd para.
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j
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Penguins are very misunderstood!
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Post by j on Mar 5, 2014 14:56:54 GMT
>>>You do not pay tax twice on dividends, you get a tax credit covering the basic rate of tax when you pay a dividend on taxed funds. talk me through this with a worked example Ltd company invests £1000 with p2p firm, at year end gets £100 interest (say) The £100 is profit is then taxed at 20% (corporation tax) so becomes £80 The director then draws that £80 as dividends The director then declares that £80 as income - then is taxed basic/high rate on that income. If you are saying that that the director don't pay personal tax on dividends based on taxed p2p interest then i guess i have been badly advised thanks jack The dividend is taxable but it comes with a non-refundable tax credit, the effect of which is that: - A 0% taxpayer loses out because they cannot reclaim the credit. - A 20% taxpayer pays no further tax. Effective tax rate 20%. - a 40% taxpayer pays additional tax topping up the effective rate to 40% (ie additional tax of £20 in your example). - a 45% taxpayer pays additional tax topping up the effective rate to 45% (ie additional tax of £25 in your example). You'll have to forgive my senior moment here, but does this mean the tax credit is equivalent to 20%?
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pikestaff
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Post by pikestaff on Mar 5, 2014 15:29:22 GMT
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Post by jackpease on Mar 5, 2014 15:37:40 GMT
Thanks for talking me through this guys.
I am sure that when i signed up to assetz as a ltd company there is a lot of stuff pointing out that if the main purpose of the company is to lend money you need a credit licence. I use p2p merely to invest my required 'float'
Pikestaff you have been really helpful - i may push my luck even further -
So lets get to basics. As in the worked example i may earn (say) £10k in salary and (say) £20k in dividends. Of the dividends, £1k (say) is derived from interest from p2p lending.
I put on my self assessment form:
£10k in employment box and then £20k in 'dividends from UK companies' box. Then i press the button and HMRC works out what i owe.
You have floated this 'tax credits' thing - so presumably i should be inserting '£1k' in some box to reflect p2p earnings in order to get the benefits you flag up? Or does the HMRC calculation 'know' this?
To anyone who says get myself an accountant i am on my fourth who may or may not take more interest in things like this. Accountants are really accessible and friendly right up to the point you commission them.
thanks
Jack
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pikestaff
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Post by pikestaff on Mar 5, 2014 15:50:14 GMT
Jack, the tax credit applies to all dividends, so there would be no need to flag anything up on your personal tax return.
The income from p2p lending would be included in your company's tax computation. I can't really help you with this, as it's a very long time since I did any company tax
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Post by oldnick on Mar 5, 2014 19:07:24 GMT
How the Revenue must laugh when they see threads like this.
The system is so arcane that the timid majority are kept in line for fear of mistakenly incurring the displeasure of the Inquisition, and the bolder minority, who chance their arm, provide good sport for the investigate department to hunt down. Tally-ho!
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mikes1531
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Post by mikes1531 on Mar 5, 2014 19:47:39 GMT
You'll have to forgive my senior moment here, but does this mean the tax credit is equivalent to 20%? This may have been answered in the worked example spreadsheet that I haven't looked at, but if not... AFAIK -- and I'm not an accountant -- the answer to the question is 'No', it's equivalent to 10%. But the tax rate on dividends for basic-rate taxpayers is 10%, so the net result is that the 'notional' tax credit matches the tax liability so that no further tax is due. AIUI, the situation for higher-rate taxpayers is more complicated, but I believe that a person in that situation still would be better off using their Ltd company to make the investment, pay the CT, and pay out what's left after CT as dividends. I don't think you'd have a problem as long as the main purpose of the Ltd Co isn't just as a vehicle for investing, but again I'm not an accountant, so someone else would be in a much better position to give a good answer.
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angrysaveruk
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Post by angrysaveruk on Mar 5, 2014 21:03:30 GMT
There is also the advantage of being able to offset bad loans against interest on your balanace sheet if you are going down the Funding Circle path (which you cant do yourself). 1. I'm sure I've read somewhere that at the moment you cannot offset bad debt from investing into p2p against tax liability (ie you sinply have to take any losses on the chin) Have I got this wrong or is there a different rule for ltd cos? 2. Did I understand this correctly, if you set up a ltd co, you can treat the profit from p2p as dividends & only pay 20%, instead of say 40% if you're a higher rate tax payer? Thanks I am not a tax expert so take my advice bearing that in mind: 1) Yes as far as I know a company can offset bad debts when they calculate their corporation tax. Companies have bad debts all the time so there are places on the CT600 form for corporation tax that allow you to take this into account (although this is not there just for P2P lending but bad debts in general). 2) No, basically the reason dividend calculations are a bit complex is because you have to gross the sum up but if you are a 40% tax payer you can basically think of it as saying you have already 20% and then just have to pay an extra 20%. However, there is a tax advantage if you keep the money in the company and you are a higher rate tax payer since basically you will only pay 20% on the interest each year so technically it will compound faster (ie you will earn more interest on the interest) - this is why rich people/celebs nearly always invest through a company. If you go to CompanyCheck.co.uk you can see all the companies owned by the rich and famous, like this investment vehicle for Paul Mcartney: companycheck.co.uk/company/00944968/MPL-COMMUNICATIONS-LIMITED/financial-accounts - 32million in the bank  HMRC benefit from people who earn higher interest rates on their savings through P2P so there is no reason for them to discourage it what so ever. Generally HMRC like it when you pay more tax Even in the case of keeping the money in so it can compound at a faster rate, ultimately HMRC will get more tax when it is finally taken out.
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markr
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Post by markr on Mar 6, 2014 9:06:04 GMT
I suppose the disadvantage of investing through a company for the rich and famous is that nosy buggers like us can rummage through their accounts
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Post by ajscotland on Apr 4, 2014 21:45:09 GMT
I started invest through my company as a way of earning interest on the corporation tax in the month before payment before it is due. I have taken my investment a bit further than this. My company accounts are verified by an experiences accountant This I my analysis With a company you can offset defaults and capital losses against any income and therefore in a better position than an individual. Defaults are a material risk in P2P The company pays 20% corporation tax on any capital gains; as an individual you have a CGT allowance. However the business model for P2P is profit through interest earned rather than capital gain this point is of little relevance A company’s profits are taxed at 20% corporation tax; An individual pays 20%, 40% , or 50% depending on their gross income When you receive dividends the income tax paid is dependent on the total income received in the. If your total pay is less than the higher rate threshold then no tax is paid on dividends. I you become a higher rate tax payer then the extra tax paid on dividends – see www.gov.uk/tax-on-dividends for details. As a director I choose whether or not to pay dividends or retain the profit for say further investment in P2P. If you are a 20% tax payer then the company is attractive as losses are mitigated. If you are a 40% tax payer the calcs are more complex as the P2P profit is taxed twice. The choice then of how to invest in P2P is very much down to personal circumstances. The dynamics will change once it become possible to put P2P inside an ISA wrapper where it then is effect untaxed I hope this helps |
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james
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Post by james on Apr 6, 2014 8:59:50 GMT
It doesn't take a SSAS to benefit from pensions, a normal personal pension can be used.
For those who are employees of another business, an employer offering salary sacrifice pension contributions can be very efficient because you save the employee NI and may also get some of the employer NI. Since this income isn't from that employment you can end up saving basic rate NI of 12% because that is based on the income from only that employment, while also saving higher rate income tax if your total income is in that range. With say 50% of the employer NI being added you can end up saving 40 + 12 + 13.8/2 = 58.9%.
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Post by bracknellboy on Apr 6, 2014 11:19:56 GMT
For those who are employees of another business, an employer offering salary sacrifice pension contributions can be very efficient because you save the employee NI and may also get some of the employer NI. Since this income isn't from that employment you can end up saving basic rate NI of 12% because that is based on the income from only that employment, while also saving higher rate income tax if your total income is in that range. With say 50% of the employer NI being added you can end up saving 40 + 12 + 13.8/2 = 58.9%. Once earnings are above the 'Upper Earnings Limit' the employee NI rate drops to 2% (on the amount over the threshold). The UEL is £805 p/w in 14-15 tax year (just under £42k pa). I suspect, though am not sure, that once you allow for personal allowance (for income tax) this is very close to/coincident with the threshold for higher tax rate to kick in. Therefore you won't get the 40+12 saving, you will get 40+2 % saving. I don't know how many employers throw in 50% of their saving on NI. Mine does have a mechanism for 'matching' which when you do the calcs you realise is offerred because it represents a cut of the employer NI savings which arise.
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james
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Post by james on Apr 6, 2014 13:44:26 GMT
Once earnings are above the 'Upper Earnings Limit' the employee NI rate drops to 2% (on the amount over the threshold). The UEL is £805 p/w in 14-15 tax year (just under £42k pa). I suspect, though am not sure, that once you allow for personal allowance (for income tax) this is very close to/coincident with the threshold for higher tax rate to kick in. Therefore you won't get the 40+12 saving, you will get 40+2 % saving. It was inevitable that someone would get this wrong, thanks for being the volunteer. The UEL applies to earnings from that employment, not total taxable earnings. Income tax applies to total taxable earnings. The P2x income is not earnings from that employment and the employer will neither know about them nor include them in any way in its calculations of what rate of NI applies. To make it clearer, lets pretend that higher rate and the UEL are both £40,000 and that income from the job is £42,000 while income from P2x and other sources is another £2,000. Total taxable income of £44,000 so higher rate tax paid on £4,000. For the first £2,000 part of salary sacrifice the situation is as you described, 40% income tax + 2% employee NI plus any employer NI. Taxable income is the £40,000 post-sacrifice pay plus the £2,000 P2x so you remain liable for higher rate income tax on the £2,000 P2x income. Though your employer won't deduct the income tax for this £2,000, you'll have HMRC charging it when you tell them (also pretending that it's not done via the tax code, which it might be if you tell HMRC in advance). Now sacrifice another £2,000. The income from employment is now £38,000 and all below the UEL so the NI reduction is 12% of this additional £2,000. The income tax reduction from the work part of income tax is 20% in PAYE but you also save the other 20% of income tax because your total taxable income has dropped again, now from £42,000 to £40,000 so that £2,000 of P2x is no longer taxable at higher rate. So you end up with the 12% below UEL (loosely basic rate) NI saving and also 40% income tax saving plus any employer NI gain. And that's how you end up with 40% income tax saving and 12% NI saving on the money. Tricky but easy enough to follow once you follow the implications of the difference between NI on the PAYE earnings and income tax on total earnings. Of course you're right that it's really UEL rather than higher/basic income tax rate that sets when the NI change happens. For the just-ended 2013/14 tax year the UEL equivalent for even payments each week is £41,450 (797 a week) NI and higher rate starts from £41,450 (£9440 + £32,010). For 2014/15 it's £41,865 (£805 a week) NI and £41,865 (£10,000 + £31,865). Pretending that higher rate and NI change at the same point is a pretty decent approximation. It's deliberate policy of this government for them to be the same. But it's only a decent approximation, not strictly correct. For something else usable, the NI is weekly but the income tax is annual. If you can get your employer to pay you only minimum wage for part of the year and concentrate all of the rest of your income in one month you can save lots of NI because the NI will hit the UEL and you'll be charged only 2% on the bit above the UEL in that pay period, instead of 12% on much of it if it had been spread out over the whole year. Those with low basic pay levels and large bonus payments made in one pay period can end up gaining from this. For NI geeks there's also the upper accrual point that is fixed at £770 a week and sets the amount that counts for the Additional State Pension. This was frozen at this value in 2008/9 to gradually reduce the amount of ASP that could be accrued. For those who were contracted out into a personal pension HMRC got the calculation wrong in the year it was introduced and had to ask for some money to be returned - they had paid out based on the UEL not the then-new UAP. I don't know how many employers throw in 50% of their saving on NI. Mine does have a mechanism for 'matching' which when you do the calcs you realise is offerred because it represents a cut of the employer NI savings which arise. Nor do I. Mine that do salary sacrifice have been 100% or 50% but many use 0%. I currently get 50% and all my P2x income ends up with that 58.9% gain, plus some straight employer contribution matching as well, though that's all used up well before the P2x income comes into play.
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