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Section C: Q32

Specimen exam

Q32 Section C

The following scenario relates to two requirements.

You should assume that today’s date is 1 March 2019.

Sarah is currently self-employed. If she continues to trade on a self-employed basis, her total income tax liability and national insurance contributions (NIC) for the tax year 2019-20 will be £12,631.

However, Sarah is considering incorporating her business on 6 April 2019.

The forecast taxable total profits of the new limited company for the year ended 5 April 2020 will be £50,000 (before taking account of any director’s remuneration).

Sarah will pay herself gross director’s remuneration of £30,000 and dividends of £10,000.

The balance of profits will remain undrawn within the new company.

(b)  Advise Sarah as to why her proposed basis of extracting profits from the new limited company is not optimum for tax purposes, and suggest how the mix of director's remuneration and dividends could therefore be improved.

Note: You are not expected to calculate any revised tax or NIC figures. (2 marks)
(10 marks)