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December 2012 paper Q4 Sophia Wong

Forums › ACCA Forums › ACCA TX Taxation Forums › December 2012 paper Q4 Sophia Wong

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  • May 15, 2013 at 7:00 pm #125600
    Avatarnataly1986
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    • Topics: 21
    • Replies: 65
    • ☆☆

    Can someone explain why Tax suffered at source calculated as 63,636 at 10%= 6,364 instead of 71,111*10%=7,111 ???
    Look at the example and the answer from December 2012 paper below
    Required:
    Assuming that Sophia Wong incorporates her business on 6 April 2011, advise her whether or not there will be an overall saving of tax and national insurance contributions (NIC) for the tax year 2011–12 if she withdraws all of the profits from the new company as:
    (ii) dividends (after allowing for corporation tax, net dividends will be £64,000).
    Notes:
    1. For both alternatives, you are expected to calculate the corporation tax liability (if any) of the new limited company for the year ended 5 April 2012, the income tax payable by Sophia Wong, and the class 1 NIC (if any) payable by Sophia and the new company.
    2. You should assume that the rates of corporation tax remain unchanged.
    (ii) Profits withdrawn as dividends
    (1) There will be no class 1 NIC.
    (2) The corporation tax liability of the new company for the year ended 5 April 2012 will be £16,000 (80,000 – 64,000).
    (3) The income tax payable by Sophia for 2011–12 will be:
    £
    Dividends (64,000 x 100/90) 71,111
    Personal allowance (7,475)
    –––––––
    Taxable income 63,636
    –––––––
    Income tax
    £
    35,000 at 10% 3,500
    28,636 at 32•5% 9,307
    –––––––
    63,636
    ––––––– –––––––
    Income tax liability 12,807
    Tax suffered at source (63,636 at 10%) (6,364)
    –––––––
    Income tax payable 6,443
    –––––––
    (4) The total tax and NIC cost if all of the new company’s profits are withdrawn as dividends is £22,443 (16,000 + 6,443), which is £3,620 (26,063 – 22,443) less than the cost on a self-employed basis.

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