Taxation of the unincorporated business for Paper P6 (UK) - part 2: self-test answers

Test your understanding: answers

(1). Jocasta’s salary is not employment income but is merely part of her partnership profit share. Accordingly, she will only pay class 2 and class 4 National Insurance contributions. She will not have to pay class 1 National Insurance contributions.

(2). A company’s distributable profits are after the deduction of corporation tax. Accordingly, RFJ Ltd will have paid corporation tax on its profits. Due to the level of the company’s profits, corporation tax will have been paid at the small company rate. Rakel will then pay income tax at an effective rate of 25% on the dividend received 100/90 x (32.5% – 10%) = 25%).

 £
 

Corporation tax

  
£38,000 x (20/(100 – 20))

9,500

 
   

Income tax

  

£38,000 x 25%

9,500

 
 

19,000

 

(3). The bonus and the related employer’s class 1 National Insurance contributions are deductible in arriving at the company’s taxable total profits. The taxable total profits of UBJ Ltd are between the limits, such that at the margin it will be paying corporation tax at an effective rate of 21.25%.

 £
 

Bonus

28,000

 

Employer’s class 1 national insurance contributions (£28,000 x 13.8%)


3,864

 
 

31,864

 

Corporation tax deduction (£31,864 x 21.25%)


(6,771)

 

Post-tax cost

25,093