19:40 PM, 21st November 2022, About 10 months ago 49
I hear a lot of talk about double taxation for private landlords who decide to incorporate. However, when I explain that a husband and wife could withdraw £100,540 a year between them from their company and pay less than half the amount of tax as individual landlords, that tends to get people thinking a bit more. That’s after factoring in the corporation tax and tax on dividends by the way!
I modeled how this might look for a couple with a rental property business based on two options, i.e. staying as a partnership and suffering the full effects of the changes to mortgage interest relief vs incorporating. The figures I used are:-
• Gross rental income of £330,000
• Mortgage interest £100,000
• Allowable expenses £100,000
• Net profit £130,000
Note that ‘allowable expenses’ can include Directors’ salaries. Assuming the Directors have no other income, they can each earn £12,570 a year without paying income tax or National Insurance. Furthermore, there would be no employers NIC’s to pay at this level.
If the business was incorporated the owners could each take £12,570 as a salary, which would reduce the company profits to £104,860. In the current tax year that would produce £19,923.24 of corporation tax. The owners could then take a further £37,500 each in dividends which would be taxed at 8.75%, i.e. £3,281.25 of personal dividend tax. The total tax payable would be £26,485.75.
However, as private individuals, they would pay tax of £23,428.40 each after factoring in their 20% tax credit on finance costs. This is a total tax bill of £46,856.80.
In other words, incorporation would reduce their total tax by around £20,000 a year!
This is because the £100,000 of finance costs are added to their taxable income if they remain as individual landlords. Their taxable income would then be £230,000, i.e. £115,000 each.
What would you rather pay in tax, £26,485.75 or or £46,856.40?
Now let me put it another way; the increased amount of money available for Directors’ personal spending would be circa £20,000 a year more after paying all due tax under the Limited Company structure when compared to making no changes and continuing to pay tax as individual landlords. Also, note that in the example I have created the company would also be retaining some of its profits. This can be saved for a rainy day, used to pay down mortgages, or for further investment.
Alternatively, the Directors might want to treat themselves to a new Tessla, or in fact any other electric car!
The entire cost of electric cars can be offset against the company profits and the tax on the “benefit in kind” is just a fraction of the cost of a car with a combustion engine.
I read and hear so much negative commentary in regards to “double taxation” when it comes to incorporation and extracting money in the form of dividends and I am shocked at how few people have actually thought this through.
Perhaps they don’t want to halve their tax bill and have the option to drive an eco-friendly, 4 door, 4 wheel drive supercar that can do 0-60 faster than a Lamborghini?
Electric cars represent a cleaner, greener way to use everyday transport. But they also offer compelling financial incentives for business and personal purchasers.
This page was first published in January 2017, hence some of the older comments below. However, it was updated again on 21st November 2022.
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