Fact pattern

Susan Wright, Charles Thompson and John Dodgson have recently incorporated their business. Having previously operated as a partnership, they are seeking advice as to how they, as directors and shareholders, will be subject to taxation on payments made to them. In addition, they need advice on how such payments affect their company, Winstern Limited.

Each director is to receive an annual salary, as each is going to be involved in the business on a day-to-day basis.

Provided that they are of an income nature and incurred wholly and exclusively for the purpose of the business, salary payments to directors can be deducted from Winstern’s income, to reduce its taxable profits.

For a director, salary will be subject to tax under ITEPA 2003. Any other benefits, including company cars, health care, etc., are also subject to tax under this Act.

Company car benefits are calculated according to an annual sum. This sum will be a percentage of between 16% and 37% - based on carbon dioxide emissions - of the car’s official list price. A 4% supplement may be for certain diesel cars.

An employee who occupies premises by reason of his employment will be taxed on the difference between the market rent and the rent paid by the employee.

Where an employee receives a loan from an employer at a rate lower than the market rate (taken as the HMRC official rate), the annual monetary value of the difference will be treated as a taxable benefit for that employee.

The employee will pay interest of £300 pa (1% of £30,000) as compared to the official rate of £900 (3% of £30,000). The taxable benefit, being the difference between the two, is £600, 20% of which is £120.

The payment of a dividend to its shareholders by Winstern does not reduce its liability to corporation tax. Dividends will be paid out of already taxed profits, so they are neither an expense of the business nor a charge on its income.

A taxpayer is taxed on dividend income according to specific rates. For FY20, these are: 7.5% for basic rate taxpayers (up to £37,500 of taxable income), 32.5% for higher rate taxpayers (above £37,500 of taxable income), and an additional rate of 38.1% for those whose income exceeds £150,000. The dividend income will be treated as the top slice of their income in order to determine the specific rate applicable.

In the case of Winstern Limited, John Dodgson is likely, before receiving a dividend of £65,000, to have income of £31,000.