Have you set up a limited company or you’re about to? Look no further as this practical guide will help you understand the core principles of a UK limited company and its tax implications.
There are many taxes to consider that may have left you confused and overwhelmed where to start such as Corporation Tax, VAT and National Insurance and how these ties back to your own personal income tax liability. However, we would like to lift the bonnet and see some of the main features of each that you should be aware of.
A limited company is legally a different entity to you personally as the shareholder
Corporation Tax
All limited companies must pay Corporation Tax on company profits, which is currently at a rate of 19%. If your contract is not caught by ‘IR35’, one of the most common tax efficient methods of extracting company profits is to pay yourself a low salary. This low salary gets deducted as an expense against the company profits saving corporation tax and the aim is to have this salary less than any personal national insurance and income tax thresholds so that there is 0 ‘tax’ to pay for the company and for you personally; you heard it! Furthermore, despite paying 0 tax on this low salary, the threshold may also be set to a level where you still contribute to your national insurance stamp towards a state pension later on in life. As the salary is low, it needs topping up to a liveable wage for you personally which could be achieved with dividends. Dividends can be paid to you personally so long as there is enough ‘cash’ (distributable reserves) in the company; but this will depend on your personal circumstances.
If your contract is caught by IR35, then your salary and expenses will roughly add up to your company’s income. The company will make little net profit on which to pay Corporation Tax as a result. More information on IR35 can be found on the government’s website here. Furthermore, get in touch with us at Everyday Accountants and we will be more than happy to support you.
Corporation tax due dates
For small companies, the current rate is 19% on profits up to £1.5 million. For large companies with profits of £1.5 million or more, the main rate is also 19% currently as it stands. Each year, your company must complete a Corporation Tax return within 12 months and the tax is normally payable within 9 months and 1 day of your company’s accounting period; with exceptions such as year one accounts from incorporation or large company status. HMRC impose penalties for missing these deadlines.
Please read our blog “Corporate tax hike announced following 3 March 2021 UK budget” for the latest changes on corporation tax.
Must all companies pay corporation tax?
Yes, all limited companies based in the UK have to pay Corporation Tax on their profits, including personal service companies.
Employer’s National Insurance Contributions (NICs)
This cost is based on the amount of your gross salary and payable at a rate of 13.8% on earnings over £170 per week in 2021-2022 tax year. It is payable monthly or quarterly depending on the company’s PAYE / NIC bill. If your contract is caught by IR35, your salary will be higher as a result and so therefore your Employer’s NIC would be higher. If your contract is not caught by IR35, you can elect to pay yourself a lower salary and higher dividend. NICs are not payable on company dividends.
VAT (Value Added Tax)
If your company is registered for standard rate VAT, you will need to charge 20% VAT on your invoices. This must be accounted to HMRC, usually on a quarterly basis. You can make claims for bills with VAT on (‘input VAT’) and offset against any sales tax suffered (‘output VAT’) before you make a payment to HMRC.
As a small business, you may be eligible to register for the Flat Rate VAT scheme which is a government incentive to simplify VAT. It means you charge a standard rate of 20% on your invoices but pay HMRC a lower rate. If you are defined as limited cost trader, this rate is 16.5%. Otherwise, the rate payable is dependent on your profession. There is a discount of 1% in the first year of being registered for flat rate VAT.
Dividend tax free allowance
In 2021-2022 there is a £2,000 dividend allowance which is being removed after this tax year. This means that as a shareholder, you can draw down £2,000 in dividends before it is subject to income tax.
Note that this allowance is tax free, but still takes up £2000 of your basic rate tax rate tax allowance (up to £37,699 for 2021-2022).
Examples of tax-deductible expenses for limited companies
You can deduct expenses and bills from your turnover so long as they were ‘wholly, exclusively and necessarily’ in the course of running your company.
Examples of these could include:
- Travel and parking (although not commuting, unless you are classed as a temporary worker)
- Mileage if using your own vehicle (although not commuting, unless you are classed as a temporary worker)
- Subsistence while away from your usual workplace
- Accommodation when away from normal place of business
- Stationary, printing and postage costs
- Salaries
- Pension contributions (via an approved scheme)
- Telephone and broadband (if it’s in the company name)
- Costs of advertising and marketing the business
- Business insurances
- Professional fees, including accounting fees
- Certain professional subscriptions.
Keep hold of your accounting records
You must keep accounting records relating to your limited company for 6 years from the end of the last company financial year they relate to. This includes records of all money spent and received by the company, for example receipts, invoices, contracts and bank statements.
Are there tax advantages of having a private limited company?
Depending on your circumstances, you may pay less tax if you operate your business as a limited company. For example, if you pay yourself a lower salary combined with a higher dividend, you may pay less personal tax than say, a sole trader; with exceptions.
There are many other benefits besides, as well as some disadvantages, and these should be carefully weighed up before you decide to go down the limited company route.
How to complete a limited company tax return
Your company must file a company tax return even if you make a loss or have no Corporation Tax to pay. This involves working out your profit and loss for Corporation Tax and calculating your Corporation Tax bill. At Everyday Accountants, we can prepare and file this on your behalf, as well as filing your annual accounts with Companies House.
Want to know more? Please get in touch with us at Everyday Accountants and we will be more than happy to support you.
Information accurate at the time of writing.