The Tax Effects of Equipment and Training

Graeme Bennett of contractor accountants Forbes Young explains 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 (i.e. which totals the £41,865 gross higher rate tax threshold), you will pay income tax on those £800 dividends of 25% i.e. £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.

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


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#4 Danny 2014-08-08 15:10
Graeme - Thanks, but, again, I think you're writing for people who have a solid grasp of the way the tax system works in relation to contractors. I don't. Incidentally, I'm not stupid, I just find tax a black art that I don't fully understand, which is why I subscribe to Contractor Weekly.

northernladuk - Thanks, but I don't believe writing articles for a site with search functionality means that you can omit a clear conclusion. I'm not trolling, I just don't believe the article was written in such a way that someone who is confused by the tax system - for example, me - would conclude "Ah, OK, *that's* what I should do the next time I want to sign up for a course". Surely that's what the article should do, no?
#3 northernladuk 2014-08-06 19:07
Have you tried a search Danny?
#2 Graeme Bennett 2014-08-06 14:07
The article gives you a choice and explains the actual cost of an equipment purchase 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.
#1 Danny 2014-08-06 08:59
Sorry, but I find this really confusing. You're mixing negatives with positives. As a contractor working outside of IR35 (or at least striving to always do so), should I take the £1000 as a dividend and then spend it on equipment/train ing, or should I claim the £1000 as equipment/train ing expenses?

I just feel the article is missing a conclusion, and I would love to know what it is.

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