When you choose to set up a limited company, the directors are responsible for paying the company’s tax liabilities accurately and on-time.
Failure to properly pay taxes can result in hefty fines, so the best way to avoid this is with effective planning and understanding your responsibilities as a business owner. To help get you started, here is an summary of the various taxes that you will encounter as a company director.
1. Corporation Tax (CT)
Every financial year, your company is required to pay Corporation Tax on the profits it has earned by filing a CT600 form. All companies, regardless of size, pay the same rate of tax.
You (or more likely, your accountant) must pay any tax owed within 9 months and a day of your company year end. The current CT rate is 19% (2018/19 tax year).
2. Value Added Tax (VAT)
If your company’s annual turnover is less than £85,000, then you will not need to concern yourself with VAT. However, you can choose to pay it if you wish. For those companies with turnover greater than £85,000, registering for VAT is compulsory.
VAT is charged on almost all UK products but is different from other taxes as it is the company itself who collects it on behalf of HMRC, rather than the Government collecting it directly.
If you do register for VAT, this can be beneficial to your company as it allows you to deduct the cost of any VAT your business incurs via day-to-day expenses. When paying VAT, you have a couple of different options with which route to take. You can take the traditional method of calculating the amount from each individual transaction or can instead apply a flat rate across all turnover.
Deciding which method to take will depend largely on the type of business you run. VAT laws are quite complex and HMRC has in-depth guides on registering and understanding exactly how much you’ll need to pay. An accountant will be able to analyse your financial profile and suggest an appropriate VAT scheme to register for.
3. National Insurance (NI)
National Insurance Contributions (NICs) are due on the salaries paid to company employees (not dividend income). They are collected by the employer and paid to HMRC monthly or quarterly.
Class 1 NICs are paid by both the employer and employees, on income higher than the prevailing minimum thresholds. You can see these percentages here.
During the 2018/19 tax year, for example, Employers’ NIC is levied at 13.8% on salaries over £162 per week. Employees’ NICs are 12% between £162-£892 per week, and at 2% over £892 per week.
Importantly, should you company be eligible, the first £3,000 of Employers’ NICs can be written off, thanks to the Employment Allowance tax incentive.
4. Income Tax (for directors and employees)
During the 2018/19 tax year, the personal allowance is £11,850 – this is the amount of income you can earn tax-free.
Above this, all employees and any directors taking a salary are required to pay varying rates of income tax depending on their overall annual income. The prevailing tax bands are basic (20%), higher (40%), and additional (45%) if you earn £150,000 or more.
Many company owners elect to pay themselves small salaries – which attract minimal levels of income tax and National Insurance. They take most of their income in the form of dividends (below).
You can view the current income tax rates here.
5. Dividend Tax
You are liable to pay tax on any dividends you receive during each tax year. Since April 2016 the way dividends is taxed has changed fundamentally. Prior to this date, a system of ‘tax credits’ was used to compensate shareholders for the fact that Corporation Tax had already been paid on company profits.
These days, dividends are taxed at three flat rates, although the first £2,000 are included within a ‘dividend allowance’ (which was slashed from £5,000 in April 2018).
The prevailing rates are 7.5% (basic), 32.5% (higher) and 38.1% (additional).
You can read more on the Gov.UK guide to dividend tax.
Other types of tax
What can an accountant do for you?
When you first set up a limited company, your obligations as a company director may seem very onerous – particularly when it comes to understanding tax, and keeping on top of your accounting paperwork. We highly recommend you hire an accountant who will be able to take care of all your tax concerns, and make sure you submit your paperwork, and pay your company tax liabilities on time.