Limited Company Taxes
Navigating the intricate landscape of self-employment is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Limited Companies. But what are the limited company taxes you need to pay?
As the director of a limited company, you are responsible for ensuring all personal and business taxes are paid on time. If they’re not, you could be liable for penalties and fines.
In this comprehensive guide, we delve deep into the heart of limited companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions.
Corporation Tax
Corporation tax is a tax limited companies pay on their business profits. It is calculated by taking the business’s revenues, deducting allowable expenses (including salaries), and multiplying by the corporation tax rate.
HMRC don’t automatically give you a bill for corporation tax; there are a few things you must do to register, calculate, report, and pay the tax owed:
i) Register For Corporation Tax
You must register for corporation tax when incorporating a limited company or restarting a dormant business. Unlike VAT and PAYE, it is compulsory to register for corporation tax, and you must do so within three months of starting to trade.
Sign in to your business’ Government Gateway account to register for Corporation Tax. You’ll need to tell HMRC when you started to trade, as it will dictate your accounting period for corporation tax purposes. HMRC will then use this information to provide you with the deadline for paying corporation tax.
ii) Prepare And File A Company Tax Return
To know whether your business owes any corporation tax, you need to prepare a tax return (also known as form CT600). While completing the return yourself is possible, most companies get an accountant to do it.
A company tax return reports your company’s profits or losses for corporation tax, as well as your corporation tax bill. It involves submitting a financial report alongside supporting calculations.
You must file form CT600 if your company gets a ‘notice to deliver a company tax return’ from HMRC. You must file even if your company has made a loss or you have no corporation tax to pay.
The deadline for filing is 12 months after the end of the accounting period the return covers. Your accounting period can be checked by signing into your business tax account on Government Gateway.
Form CT600 is filed online unless you have a reasonable excuse for why this isn’t possible or want to file in the Welsh language.
As of 1 April 2024, the corporation tax rates:
- For companies with augmented profits of less than £50,000, the corporation tax rate will continue to be 19%.
- For companies with greater than £250,000 in augmented profits, the corporation tax rate will be 25%.
- For companies with augmented profits between £50,000 and £250,000, the tax due is calculated at 25% but tapered down using a marginal relief calculation.
Augmented profits are defined as the company’s taxable total profits of the period plus any exempt dividends from non-group companies.
iii) Pay The Corporation Tax Owed
The deadline for paying your corporation tax bill is nine months and one day after the end of your accounting period.
You’ll notice that the deadline for paying your corporation tax is before the deadline for filing your company tax return. Despite this, you’ll need to complete a tax return (even if it’s not immediately available) to determine how much tax is owed.
HMRC maintains a detailed list of all the ways you can pay your corporation’s tax bill.
VAT
Value-added tax (VAT) is a goods and services tax added to most products and services sold by VAT-registered businesses. You must register for VAT if:
- Your total VAT taxable turnover for the last 12 months was over £90,000 (the VAT threshold); or
- You expect your turnover to go over £90,000 in the next 30 days.
It’s important to note that turnover is different to taxable income. If you expect to be billing more than £90,000 over the coming year, you must register for VAT.
Your VAT Return is a form you fill in to tell HMRC how much VAT you’ve charged and how much you’ve paid to other businesses. If you’re registered for VAT, you must submit a return every 3 months even if you have no VAT to pay or reclaim. The deadline for submitting your return online is usually one calendar month and 7 days after the end of an accounting period. This is also the deadline for paying HMRC.
There are two VAT schemes you can choose from:
i) Flat Rate
You pay a fixed rate of VAT to HMRC and keep the difference between what you charge your clients and what you pay. Under the flat rate VAT scheme, you cannot reclaim the VAT on your purchases.
It is designed for smaller businesses with a turnover of less than £150,000 per year, very few purchases, and looking to simplify their record keeping.
The VAT flat rate you use depends on your business type, and you get a 1% discount if you’re in your first year as a VAT-registered business. You calculate the tax you pay by multiplying your VAT flat rate by your ‘VAT inclusive turnover’.
Say you’re a photographer and bill a customer £1,000. Adding VAT at 20% means you receive £1,200 in total. As a photographer, your flat rate is 11%. Your flat rate payment will be 11% of £1,200, or £132.
ii) Standard
You charge clients 20% VAT on all invoices and reclaim 20% on all purchases. Your VAT liability is the difference between any VAT you’ve paid to other businesses and the VAT you’ve charged your customers. If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, HMRC will usually repay you the difference.
You must use the standard scheme if your turnover is greater than £150,000 per year, and it is recommended if your business has a lot of purchases.
Most bookkeeping software will automatically track the VAT charged and paid and calculate the final VAT position for a three-month period. This simplifies the analytical work required and speeds up the submission process.
When you consider that most limited company contractors employ an accountant to submit their VAT returns, it’s no wonder that most choose the standard rate instead of the flat rate.
PAYE
PAYE is HMRC’s system for collecting Income Tax and National Insurance from employment. To run PAYE, you must register as an employer. You must do so if you intend to employ any staff (even if it’s your spouse).
You need to register even if you’re only employing yourself, for example, as the only director of a limited company. You must register before the first payday, and you cannot register more than two months before you start making salary payments.
Under PAYE, you are responsible for deducting income tax and National Insurance Contributions from your employees’ wages and paying this to HMRC every month. Most contractors that operate PAYE choose to outsource the process to their accountant or use one of HMRC’s approved payroll software providers.
Employer’s National Insurance
As an employer, you must pay National Insurance Contributions on your employee’s wages. These are known as ‘secondary Class 1 NICs’ and are not to be confused with ‘primary Class 1 NICs’ made by employees through PAYE.
Employers pay Class 1 (secondary) NICs at a rate of 13.8% on employees’ earnings above the secondary threshold of £9,100 per year. Employers of employees under 21 or apprentices under 25 pay a zero rate on wages up to the upper secondary threshold of £50,270 per year. On earnings above these thresholds, employer NICs are payable at 13.8%.
The employment allowance reduces the amount of employer NICs payable by eligible businesses up to the allowance limit (currently £5,000 per year). Unfortunately, the employment allowance is not claimable if you are the sole director and only paid employee, a working arrangement that captures most contractors.
Employer’s NIC calculations are usually handled when you run your payroll. The taxes for that payroll run (such as PAYE income tax and National Insurance) are due by HMRC between the 6th and 22nd of the following month.
Self-Assessment
If you intend to pay a dividend from your limited company, you must register for self-assessment. Self-assessment is the system HMRC use to collect individual taxes owed that are not taxed at source (e.g. via PAYE).
While the previous taxes discussed in this article are business taxes, self-assessment deals with the personal taxes of limited company directors. Predominantly income tax and dividend tax.