JUMBO LTD.



Case Study

Abstract

This paper discusses the concept of Income tax, National Insurance Contribution, and taxable benefits, of Mr. Jedward and Jumbo Ltd. from the perspective of employee and employer. Moreover, the impact of tax system on the staff parties, from the employee's and employer's points of view is also presented along with the tax implications for Jumbo Ltd of buying the new machinery and cars, and borrowing money to finance the purchases.

Case Study

Overview of the Case

Mr Jedward, a happily married, is the managing director of Jumbo Ltd., a small manufacturing company. He is the only shareholder of the company's entire lot of shares. The company is subjected to the small profits rate of corporation tax. Like all other business man, Mr Jedward is a tax evader. He only withdraws his salary from the company and does not avail any benefits or other facilities. He would like to conduct a cost benefit analysis of paying tax against receiving benefits. Moreover, he is also considering of investing in new plant and machinery as the existing stock is getting obsolete. To finance this expansion, he would have to borrow money and funds. He has estimated that the cost of the new machinery would be £2,000,000. He is also considering the notion of investing in three cars for his senior employees with each car costing £15,000.

Question 1: National Insurance Contribution

National insurance contribution (NIC) is a system of collecting contribution to provide unemployment, health and pension insurance. It is an additional form of tax which is imposed on companies and self employers in UK. The schedule of NIC and Income Tax in case of Mr. Jedward and Jumbo Ltd. is presented in the table below.

Net Wage = (Gross Salary) less (Taxes) less (National Insurance Contribution)

 

Yearly

Monthly

Weekly

Daily

Gross Pay

£ 70,020 £ 5,835 £ 1,347 £ 269

Tax free allowances

£ 7,475 £ 623 £ 144 £ 28

Total Taxable

£ 62,545 £ 5,212 £ 1,203 £ 241

Tax due

£ 18,018 £ 1,501 £ 346 £ 69

National Insurance

£ 4,781 £ 398 £ 92 £ 18

Total Deductions

£ 22,799 £ 1,899 £ 438 £ 87

Net Wage

£ 47,220 £ 3,935 £ 908 £ 182

Question2: Taxable Benefits

Taxable benefits can be secured in case of loans and debt. Since interest payments are comparatively and usually lower than the tax rate, therefore, the companies save tax on the amount paid as interest. The company will gain taxable benefits in case of accommodation and purchase on debt basis. However, the implication of tax also depends upon the size of the company. In this context, it is imperative to understand the concept and definition of small companies. The term “small business” has been used widely with no one standard definition. Over the years, the media, legislature and the academic literature have presented different ideas of what a small business is and whether it is distinguished on the basis of total assets, number of owners, number of employees, annual sales, or other ...