By Lynne Gowers on 30th July 2018

The Practical Guide to Limited Company Tax

limited company tax

If you have chosen to operate your business as a limited company, or you are looking for information about doing so, this practical guide will help you understand limited company tax.

We will cover the main areas of taxation that you need to consider, including Corporation Tax, VAT and Employer’s National Insurance.

We will then go on to look at what personal tax is payable on dividends and provide a brief overview of the tax differences between limited companies and sole traders.

What taxes does your limited company pay?

Corporation Tax

All limited companies must pay Corporation Tax, which is currently at a rate of 19%. If your contract is not caught by IR35, then you will be likely to pay yourself a low salary combined with dividends – although this will vary depending on your personal circumstances and wishes. Salaries are a tax deductible expense for the company, and you will need to pay Corporation Tax on your net company profit. Dividends are payable from the after-tax retained profits of the company.

If your contract is caught by IR35, then your salary + expenses will more or less add up to your company’s income. Consequently, the company will make little net profit on which to pay Corporation Tax.

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 £162 per week. 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 will your Employer’s NIC bill.

If your contract is not caught by IR35, you can elect to pay yourself a lower salary and higher dividend. NIC is 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 input VAT on your company purchases by deduction when you make 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.

How much is Corporation Tax for a limited company?

For smaller companies, the current “small companies rate” is 19% on profits up to £300,000. For larger companies with profits of £1.5 million or more, the main rate (2018/19) is also 19%.

Each year, your company must complete a Corporation Tax return. Corporation Tax owed is payable within 9 months and 1 day of your company’s “normal due day”. This is typically the anniversary of your company’s incorporation.

Do all companies have to pay corporation tax?

Yes, all limited companies based in the UK have to pay Corporation Tax on their profits, including personal service companies.

Dividend tax free allowance

As of April 2018, the dividend allowance was reduced from £5000 to £2000. This means that as a shareholder, you can draw down £2000 in dividends before they are 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 £34,500 for 2018/19).

Examples of tax deductible expenses for limited companies

You can deduct from taxable turnover, any expenses which have been incurred 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.

How long to keep tax records for a limited company

As well as records about the company itself, you must keep financial and accounting records pertaining 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 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.

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.

Read our blog Sole trader or Limited Company – what’s right for me?

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. Your accountant will be able to prepare and file this on your behalf, as well as filing your annual accounts with Companies House.

The deadline for your company tax return is 12 months after the end of the accounting period it covers. The deadline to pay your Corporation Tax bill is usually 9 months and one day after the end of the accounting period. HMRC impose penalties for missing these deadlines.

Limited company vs Sole trader Key tax differences

Limited company

Sole trader

  • The business is a separate legal entity to you
  • You are the business
  • You serve the company as a director and/or shareholder
  • You are self-employed
  • The company pays Corporation Tax on its profits
  • Employees and office holders (including directors) are subject to PAYE and NIC on their salaries
  • Shareholders must pay income tax on dividends, with a £2000 tax free allowance
  • Where IR35 applies, the company must deduct PAYE and NIC on the deemed income (known as “deemed payments”)
  • You pay Class 2 & 4 NIC and income tax on the taxable profits of the business
  • The company can offset any trading losses against its other income, but not against your personal income.
  • You can offset any trading losses against your other income.

 

Written by Lynne Gowers
Disclaimer Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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