ACCA Strategic Professional · Advanced Taxation (UK) · Taxation effects of the financial decisions made by businesses and individuals
Zeta Ltd is a UK close company owned by its sole director and shareholder, Priya. Priya wants to withdraw £20,000 from the company in 2025/26 and the company has ample distributable reserves. Priya has already used her personal allowance through salary and is an additional rate taxpayer. Which statement best describes the corporation tax treatment in the company of paying a £20,000 dividend rather than extra salary of £20,000?
A dividend paid to a shareholder is not deductible when computing the company's taxable total profits, whereas salary and the employer's national insurance on it are deductible trading expenses. This difference in corporation tax relief is a key factor when comparing salary with dividends.
- AThe dividend is not deductible in computing the company's taxable total profits, whereas the salary and related employer NIC would be deductibleCorrect
- BThe dividend is deductible in computing taxable total profits, but salary is not
- CBoth the dividend and the salary are deductible, but only salary attracts employer NIC
- DNeither is deductible, but salary attracts employer NIC so is always cheaper for the company
Explanation
Dividends are distributions of profit after tax and give no corporation tax deduction. Salary and the employer's NIC on it are deductible expenses of the company if wholly and exclusively for the trade. The other options wrongly make dividends deductible or deny deductibility for salary.
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