Taxation of the unincorporated business (for 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 at 20% on its profits. The first £5,000 of dividends received by Rakel will be taxed at 0% due to the dividend nil rate band. The remainder of the dividend income will be taxed at 32.5%.

 £
 

Corporation tax

  
£38,000 x (20/(100 – 20))

9,500

 
   

Income tax

  

(£38,000 – £5,000) x 32.5%

10,725

 
 

20,225

 

(3). The bonus and the related employer’s class 1 National Insurance contributions are deductible in arriving at the company’s taxable total profits. 

 £
 

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 20%)


(6,373)

 

Post-tax cost

25,491