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ACCA Strategic Professional · Advanced Taxation (UK) · Taxation effects of the financial decisions made by businesses and individuals

Anil is incorporating his business and will take a salary and dividends. Which factor is a genuine tax advantage of operating through a company rather than as a sole trader?

A key advantage is that retained profits bear corporation tax at company rates instead of income tax, and the owner can choose when to extract them. Dividends are not deductible, employer national insurance applies to director salary above the threshold, and company losses cannot be used against personal income.

  1. AProfits retained in the company are taxed at corporation tax rates rather than income tax rates, and can be extracted later in a timing of his choosingCorrect
  2. BDividends paid to him are deductible in computing the company's taxable profits
  3. CEmployer's national insurance contributions are not payable on any remuneration paid to a director
  4. DLosses of the company can be set against Anil's personal income in the year they arise

Explanation

Retained profits suffer only corporation tax, at 19% to 25%, and extraction can be timed. Dividends are not deductible, employer national insurance is payable on salary above the threshold, and company losses cannot be set against a shareholder's personal income.

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