In this article, we give you an overview of the basics of limited company tax as written by the senior accountant from Dolan Accountancy. This includes the various taxes you will be liable to pay (or collect) as a limited company, and when you have to pay them.
When you set up a limited company, your personal and business finances are kept entirely separate (unlike the sole trader route). Unlike life as a salaried employee, you are now responsible for overseeing your obligations, by registering to pay tax on your company income, and ensuring that any liabilities are paid to HMRC on time.
Do I need to appoint an accountant?
You may or may not need an accountant for your limited company, or you may need the assistance of an accountant all year round or on just on an annual basis. This will vary for every limited company and their needs.
After incorporating your new company, most people appoint an accountant to take care of their tax affairs on an ongoing basis.
Some company owners prefer to take care of day-to-day accounting duties themselves, and just use a professional accountant at year-end, to prepare their company accounts.
For the majority of company owners, however, choosing the right accountant from the start is an important step, as you are likely to have quite a few questions following the initial start-up process.
Once you have appointed your accountant as your ‘agent’, they can then deal with HMRC on your behalf.
You may wish to consider appointing an Accountant who works with an online Accounting software provider, such as FreeAgent.
Do I need to pay corporation tax?
All limited companies must pay Corporation Tax on their profits, and one of the first things you will do as a new company owner is to register your new company to pay Corporation Tax.
Each year, your company must complete its company corporation tax return (CT600).
You must also pay any Corporation Tax owed within 9 months and 1 day of your company’s ‘normal due day’, which is typically the anniversary of when the company was formed.
For smaller companies, the current ‘small companies rate’ is 19% on profits up to £300,000. For larger companies with profits of £1.5m or more, the main rate is also 19% (2020/21). Between these two thresholds, a system of ‘marginal relief’ is applied.
Try our Corporation Tax calculator.
Your Corporation Tax bill is reduced by allowable expenses, such as travel, subsistence, even your salary (but not dividends). The rules and guidance on expenses is quite extensive, however, your Accountant will be able to advise on expenses which you can claim, along with any potential ways of reducing your Corporation Tax bill.
Do I need to register my company for Value Added Tax (VAT)?
If you are likely to turnover £85,000 or more during any 12 month period (this is the 2012/21 threshold), you must also register your company for Value Added Tax (VAT).
Essentially, you collect VAT on behalf of HMRC but adding the prevailing rate to your invoices (the standard rate is 20%). Once you deduct any VAT your company may have spent during a VAT quarter, you pay the balance to HMRC.
There are several types of VAT scheme available: the ‘cash’ scheme enables you to only repay VAT to HMRC once payment has been received by you, and the Flat Rate VAT scheme provides a simpler way of calculating tax, by allowing you to apply a flat VAT percentage when calculating your liabilities.
Your small business accountant will be able to work out which scheme is most likely to suit your business.
Try our VAT calculator.
The VAT Flat Rate Scheme has a joining threshold of turnover of £150,000 or less. The Cash Accounting and Annual Accounting schemes have joining thresholds of £1.35 million or less.
HMRC have recently introduced Making Tax Digital (MTD) for VAT, which means businesses registered for VAT with a taxable turnover above the VAT registration threshold of £85,000 will need to keep VAT records digitally and file their VAT returns using MTD compatible software. Fortunately, there are a lot of accounting packages out there offering compatible software – HMRC has a really handy list here.
Do I need to pay PAYE/National Insurance Contributions?
If you and any employees receive a salary, then income tax and National Insurance Contributions (NICs) are deducted at source and paid to HMRC on a monthly or quarterly basis. This the other initial task you (or your accountant) will have to set up within your company payroll.
Even if you don’t pay any salaries which breach the lower threshold for tax or NICs, you must still notify HMRC that no tax is due for that period (this is a simple process).
HMRC can be a little strict on the monthly required payroll filings (RTI’s). For late monthly submissions, the penalties can start from just £100, so ensure you’re using a reputable software to make the submissions, or that your Accountant is doing this for you as part of their services.
If your company provides to you a benefit in kind (such as health insurance or a gym membership), your company would need to pay to HMRC Class 1A NIC each year and make a submission through a P11d filing. The rate of Class 1A NIC is 13.8%. This would be an expense of your Limited company.
Personally, this would affect you via your personal tax return, in which 20% tax may be due on the benefit if all of your personal tax allowance has been used up (and your salary income is in the basic rate tax band). It can still be tax efficient to have benefits in kind through your company, as you would otherwise be paying for these personally.
What are other taxes I need to know about?
Alongside the main taxes your limited company is liable to pay, you will also have to pay tax on any income your receive personally, typically in the form of salary or dividends drawn from your company (see our dividend calculator for computations).
You settle your personal tax liabilities via the self-assessment process each year. Submit your personal tax return, together with any taxes owed, by 31st January in the year following the end of the tax year in question.
Payments on account
You may also need to make ‘Payments on Account’ towards the following tax year, if your tax bill is over £1000 and you haven’t paid more than 80% of all the tax you owed directly, i.e. through your tax code on your PAYE salary. For the tax year ending 05th April 2020, there would be a payment due 31st January 2021 and 31st July 2021.
Personal tax can be a little daunting – however, most Accountants, should you choose to appoint, will be able to provide personal tax planning for you so you don’t end up with an unexpected tax bill. Always let your Accountant know if you are receiving income from a source other than your Limited company, and they can incorporate this into your personal tax planning.
Bear in mind that this bill would need to be paid personally – if you have a Limited company, you should not make the payments from the company to HMRC.
Capital gains tax
You may also be liable to Capital Gains Tax on any assets you have disposed of during the tax year (such as shares, investments, or property).
If you sell your own company and have owned the shares for at least 12 months, then you may be eligible to pay Entrepreneurs’ Relief on the proceeds – at a flat rate of 10%.
To qualify for Entrepreneurs Relief you must have owned the business (at least 5% of the shares and voting rights) for at least 2 years before the date you close it. You should also be an employee or office holder of the company. Your company’s main activities should be trading (rather than something like an investment company).
Note – always ensure your Limited company shares state an entitlement for distribution and assets, and disposal proceeds, upon the winding up of the company. You have three years upon disposal of the company assets in order to claim the Relief.
Capital Gains tax on shares without Entrepreneur’s Relief is 10% if you’re in the basic rate tax band, and 20% in the higher rate. Capital Gains tax on properties would be either 18% or 28%.
In the 20/21 tax year, there is a tax-free Capital Gains allowance of £12,500.