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Tax effects of Equipment and training costs

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One of the most commonly discussed issues in economics is how tax rates relate to economic growth. Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth and prosperity. Others claim that if we reduce taxes, almost all of the benefits will go to the rich, as those are the ones who pay the most taxes.

I am often asked about the Tax effects of Equipment and training costs to the one person owner/director/worker limited company.

Firstly the tax effect is that if the corporation tax rate is 20% (as it is currently) then the actual net cost to the company is 80% of what is paid for the equipment. 

Say the equipment/training is £1,000 and you choose not to spend the money, then your company will have £1,000 additional profit so pay £200 corporation tax. 

If you then take what is left as dividends additional to £30,518 net already taken in this tax year and take £7,956 salary (ie which totals the £41,865 gross higher rate tax threshhold), you will pay income tax on those £800 dividends of 25% ie £200. 

Therefore in summary not to spend £1,000 on equipment/training but instead to take as a dividend will normally lead to a £400 tax bill for a higher rate taxpayer. The real cost of £1,000 expenditure here then, will be net £600. 

So in conclusion, if you are a higher rate tax payer, you can either take the £600 as a net dividend after having paid CT and IT on it, or spend the £1000 on a company purchase. 

In addition, the more your company spends on equipment and training, the stronger your IR35 position will be.

Article Source: Graeme Bennett ACMA MBA of Forbes Young

Source: Graeme Bennett ACMA MBA of Forbes Young

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Steve Smith

Steve has been associated with the UK Contracting industry for over a decade now. He is a sports enthusiast and a die hard Arsenal fan.

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