Limited company tax explained
Getting to grips with business tax and the tax obligations you have as a new business owner is essential to your day to day operations.
When starting up your limited company you’ll come across many different types of tax, but don’t let dealing with these put you off. Owning a limited company can provide tax benefits and it’s worth taking the time to get up to speed with your tax requirements, and the implications of them.
The first step in understanding the different taxes that you’ll encounter is to split them out between the tax that your company may have to pay and the tax you will have to pay personally on your salary and personal income.
Business – Corporation Tax
All limited companies have to pay Corporation Tax on the profit they make. Your own salary should be deducted from profits before you pay tax, so if you have invoiced your customers £150,000 plus VAT over one year and you’ve taken a salary (and any other expenses) of £25,000 you’ll only need to pay Corporation Tax on £125,000.
If your company earns less than £300,000 a year profit – classed as a small profit – the rate is 20%. From 1 April 2015 this changes to be the main rate of Corporation Tax.
Business – employer's National Insurance contributions (NICs)
As an employer your company is required to pay National Insurance contributions for all of your employees who are paid more than the current threshold.
You can find information on the current thresholds and the rates that companies should pay with HMRC.
Business – value added tax (VAT)
If your business’ annual revenue is over the VAT registration threshold then you’re obliged to register for VAT. As well as collecting VAT from your customers to pay back to HMRC on a quarterly basis (also known as your output tax), you can reclaim the VAT you have to pay to other businesses (also known as your input tax). The amount you’re reclaiming must not exceed the amount of VAT you’re charging others for your goods and services.
As a small business you may also be able to benefit from the flat rate VAT scheme. This applies if your VAT taxable turnover is less than £150,000 and means simpler VAT accounting as you can calculate your VAT payments as a percentage of your total VAT inclusive turnover.
Personal – PAYE
The salary you draw from your business will be liable for PAYE tax as it would if you were working for any other company if you are earning more than the tax free personal allowance.
Personal – tax on your dividends
The tax you need to pay on the dividends you receive from your business is lower than the tax you pay on your salary.
Personal – employees’ National Insurance contribution
As well as the NICs that you need to pay as a business for each of your employees, your employees, including yourself, will need to pay NICs personally as well.
While you need to pay this on your salary you don’t need to pay NICs on your dividend income.
Starting your business – tax
While your business tax can seem complicated having your paperwork in order and creating a good business plan before you get started can make a big difference. You’ll need to register your business before you register with HMRC for tax and this can be done simply and easily in as little as three hours with The Formations Company.