## Archive for September, 2009

### How do I calculate the tax credit on a dividend payment?

Monday, September 28th, 2009

Dividend payements can be taken out of company profits after corporation tax has been paid. For example:

Turnover = £100,000
Salaries and other running costs and expenses = £30,000
Net Profit = £70,000 (£100,000 - £30,000)
Corporation Tax = £14,700 (21% of £70,000)
Amount Available for Dividend Payment(s) = £55,300 (£70,000 - £14,700)

To prevent double taxation (where both corporation tax and income tax are charged on the same profits), the dividend received carries a tax credit. This effectively states that the net dividend has been taxed at the basic rate of taxation.

This means you don’t pay any further tax on your income if you are a basic rate tax payer - your taxable income is less than the higher rate tax threshold (about £36,000)

How Much Is The Tax Credit?

The tax credit is 10% of the gross dividend.

The dividend paid to shreholders is the net dividend.

With reference to the above example:

The net dividend payement is £55,300.

Therefore, the gross dividend is £55,300 x 1.111111 = £61,444.44.

Therefore, the tax credit is £6,144.44 (£61,444.44 - £55,300).

If you are a basic rate tax payer, you pay 10% of the gross dividend in tax, which is considered already paid via the tax credit. Therefore, you have no more tax to pay.

If you are a higher rate tax payer, you will be charged tax at the rate of 32.5% of the gross dividend in tax.

For our example, this is 32.5% of £61,444, which equals £19,969.44.

From this figure you need to deduct the tax credit of £6,144.44.

£19,969.44 - \$6,144.44 = £13,825.

This equates to 25% of the net dividend of £55,300.

You can use Earnings Tracker to calculate your tax credits and generate dividend tax vouchers.

Wednesday, September 23rd, 2009

Businesses often pour huge efforts in reckoning and managing various transactions including, company revenues and expenditures like invoices, salaries, expenses, etc. Any snag in these calculations would ultimately result into misinterpretation of financial results and thereby present a false picture of company’s growth. Hence, a proper handling and analysis of the financial data is highly called for. Well, you can now delegate most of your account handling troubles to Earnings Tracker 4.0. It helps the users in managing different types of transactions including, dividends, salaries, taxes, pensions, etc. Earnings Tracker is extremely easy to use and its features help in easy calculations.

Using Earnings Tracker 4.0, you just need to follow a simple process and store the transactions. To start with it, first you need to register and form an account to work with it. Log-in and you will be prompted to set the static values to carry out further calculations. With the ‘Set Static Values’ you’re required to enter the Gross Monthly Salary, VAT Flat Rate Percentage and Monthly Accountancy Fee, and then press to Update/Confirm Values to get them applied to the records. You can update your profile and start on working further. With the given ‘Add Month’ feature you can select the year, month, and record the money coming in and going out. This includes Amount Invoiced, Income Tax, Expenses, Pension Contribution, Dividend Taken, etc. With the View/Edit Spreadsheet feature first you need to select the columns like Month, Amount Invoiced, VAT Charged, Accountancy Fee, Gross Monthly Salary, Income Tax, Bank Interest, Other Revenue, Expenses Taken, Corporation Tax Due, Maximum Dividend, etc, to be displayed on the spreadsheet and enter the relevant values in it. You can even easily create and edit the dividend tax vouchers.

Earnings Tracker 4.0 application helps you in recording and managing the revenues and expenditures of your business and makes your calculations extremely easy. For its instrumental feature-set, optimal performance and purposeful assistance it offers in carrying out easy calculations, the software is rated with 3.5 points.

http://www.dixondevelopment.co.uk/earningstracker.htm

### Deciding whether to use the VAT Flat Rate Scheme (FRS)

Wednesday, September 16th, 2009

At first glance, for IT contractors who have very few expenses per month (purchases on which VAT can be claimed), joining the VAT FRS seems like a no-brainer, and for many it probably is. It is, however, worth weighing up all the figures before deciding to join the scheme.

Basically, how the scheme works is demonstrated in the following example.

Net Invoice Amount = £10,000
VAT Charged = £1500 (15% of £10,000)
Gross Amount = £11,500
VAT Payable = £1322.50 (11.5% of £11,500)
Difference between VAT charged and VAT payable = £177.50

In this example, the contractor would have made £177.50 in profit, which isn’t bad, for doing nothing.

Bank interest

However, if the contractor has a lot of money in his/her company bank account, and earns interest from that money, then the interest has to be added to the gross amount. Let’s say, for example, that the contractor earns £50 per month in interest. The figures will now be:

Net Invoice Amount = £10,000
VAT Charged = £1500 (15% of £10,000)
Gross Amount = £11,500 + £50 = £11550
VAT Payable = £1328.25 (11.5% of £11,550)
Difference between VAT charged and VAT payable = £171.75

The contractor would now have to pay £171.75, which is still pretty good. Don’t forgot though that this means two lots of tax are effectively being charged on the bank interest. Because bank interest is paid gross by the bank, it is subject to corporation tax at 21%, and it is also subject to the 11.5% VAT because of the VAT FRS.

Zero rated and exempt supplies

If the contractor also has other revenue generated by VAT exempt or zero rated supplies, these will also need to be included in the VAT calculation. So, for example, if £3000 per month is generated by supplies to other European countries, the figures would become:

Net Invoice Amount for UK Supplies= £10,000
VAT Charged = £1500 (15% of £10,000)
Gross Amount = £11,500 + £50 + £3000 = £14550
VAT Payable = £1673.25 (11.5% of £14,550)
Difference between VAT charged and VAT payable = -£173.25

Now the figures have been completely turned on their head. If you add to this the fact that most contractors have at least one or two purchases per month on which VAT can be claimed, you can see that the contractor in our example would be better off not being in the VAT FRS.

I still think for most contractors that joining the VAT FRS is a worth while thing to do. I also think, though, that it is important for contractors to take advice from their accountants before joining the scheme - just to make sure it is the right decision for them.