ACCA TX (UK) Past papers - Question 4a - December 2012

December 2012

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Question 4a

Sophia Wong is self-employed as a lawyer. For the year ended 5 April 2012 Sophia has forecast that her tax adjusted trading profit will be £80,000. This will be her only income for the tax year 2011–12, and Sophia’s total income tax liability and national insurance contributions (NIC) for this year if she continues to trade on a self-employed basis will be £26,063 as follows:

	£
Income tax	22,010
Class 2 NIC	130
Class 4 NIC	3,923
	26,063

Sophia understands that she could save tax and NIC if she instead traded as a limited company, and she is therefore considering incorporating her business on 6 April 2011. The forecast taxable total profits of the new limited company for the year ended 5 April 2012 are unchanged at £80,000 (before taking account of any director’s remuneration).

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:

(i) director’s remuneration (after allowing for employer’s class 1 NIC, gross director’s remuneration will be £71,156); or (6 marks)

(ii) dividends (after allowing for corporation tax, net dividends will be £64,000). (5 marks)

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

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