Profit Extraction 'another way?

Profit Extraction 'another way?

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With the various disasters in the past year. Many are making charitable donations. If in a position do so, is it better to let the ltd company make the charitable contributions?

On the assumption that one takes a modest salary to cover the annual personal allowances followed by taking dividends which result in going into the higher 32.5% bracket, would it not be better to make any further charitable contributions from the company as apposed to personal donations.

Say £1000 dividend received. I Pay tax at 25% =£250 and get back £26.25 (32.5-22%) tax relief.

If company pays £1000 direct. Will get 19% CT relief and will cost me nothing.

Does this make sense? Have not seen this mentioned before? Would appreciate comments.
Martin

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By Sherlock
24th Oct 2005 17:04

Depends on the circumstances
A higher rate taxpayer obtains an additional income tax relief of 18% on the grossed up contribution to charity.

In addition anyone receiving Tax Credits (either Working or Child) can treat the 'gross' donation as a deduction from income. For a basic rate taxpayer, this means an increase in Tax Credit of 37p in the pound. A higher-rate taxpayer obtains an increase of 6.67%.

A personal donation of £100 is grossed up at 22% to make £128.20, the charity being able to recover the £28.20 under Gift Aid. The increase in Tax Credit for a basic rate taxpayer is £128.20 @ 37% = £47.43. A net donation of £52.57 therefore provides the charity with £128.20. This is one example of a benevolent government!

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By User deleted
24th Oct 2005 20:51

Simpleson. why is my maths wrong?
My marginal rate is 32.5%.
Company pays C tax @19%

If I receive £100 in dividends. I pay 25% additional tax (less I presume the higher rate relief through the tax return 32.5 less 22%). This leaves me with a net extra tax liability.

If I forgo the dividend,and the company pays directly to the charity. The charity gets £1000, and the company gets 19% tax relief. It leaves me with no extra tax liability. Whilst I admit the charity will not abe to claim back the tax credit.

Am I correct that if you want the charity to benefit the most-make personal contributions

and if you want to minimise your personal tax, make company contributions?


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By User deleted
25th Oct 2005 16:12

Thank you, Barry
Martin , your concepts are wrong, as you are comparing apples with oranges.

The company you own makes profit; you want to benefit charity. Whatever level of gift you have in mind, as Barry has made clear, the dividend route is going to give the charity more bangs for your buck.

Don't underestimate the cash flow differences either.

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By User deleted
24th Oct 2005 11:38

Your maths is wrong.
Assumption is that alternative is either to draw a dividend ,or use corporate gift aid. , which I think are the alternatives given

The assumption is that the company is paying 19% CT, and its profits exceed £10,000 pa.
But your mathematics is wrong .

If you pay basic rate tax only, then the charity does marginally better with the personal route.
Suppose the comapny makes a donation of £123.46 - which costs it after CT relief[not less than 10 months later]£100.
Alternatively the company pays the CT, and the individual receives £100 dividend, which he pays to the charity. The charity now recovers 11/78 *£100, or £128.21.
So with a corporate gift
a] the company has to wait for its tax relief
and
b] the charity collects less.

If the taxpayer is a higher rate tax payer and has non dividend income in excess of his PA's, then the figures become even more skewed, as the individual also recovers £23.18 higher rate tax[18/78 *the GA payment]

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By barryhallam
25th Oct 2005 14:00

Not worse off...

...If, apart from the small salary, your only income is dividend income and this income puts you into higher rate, then you could get 22.5% tax relief on the gross Gift Aid payment (28.84% of the net gift) in addition to the basic rate (22%).

In that scenario if you gifted your net dividend of £100 to charity you would be 3.84% better off (28.84% less 25% HR Tax on div)

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