The Basics of Limited Company Tax
As a new business owner of a limited company, understanding Limited Company Tax plus any tax obligations is critical to your daily operations.
When setting up your limited company you will encounter various types of tax, however don’t let dealing with these deter you. Owning your own company can also provide tax benefits, therefore it’s worth taking the time to educate yourself on limited company tax requirements and their implications.
Firstly, it’s important to understand that by owning a limited company your personal and business finances are kept completely separate. Your taxes will be split between the tax that your company requires to pay and the taxes you will have to pay personally on your salary/ personal income. You are now responsible for managing your obligations, registering to pay tax on your company income and ensuring any liabilities are paid to HMRC promptly.
Establishing an Accountant
Some business owners prefer to look after the day to day accounting tasks and duties themselves and solely use an accountant to prepare their year-end company accounts.
However, for the majority of new company owners, once their company is incorporated, they will appoint an accountant to take care of their ongoing tax affairs and record-filing.
Choosing the right accountant from the start is a vital decision because setting up a business, albeit exciting, can be an overwhelming process. Therefore, an accountant with the required skills and knowledge will be able to guide you through the initial stages and enable your business to grow effectively. Once you have assigned an accountant, they will deal with HMRC on your behalf.
All limited companies have to pay Corporation Tax on the profit they make. You are required to register your business to pay Corporation Tax then each year your company must complete its company corporation tax return (CT600).
Keep accounting records and prepare a company tax return to work out how much Corporation Tax you need to pay. You must pay any Corporation Tax by your deadline which is typically 9 months and 1 day after the end of your “accounting period” or anniversary of when the company is formed.
The current Corporation Tax rate for company profits is 19%. This is now a standardised rate for all businesses. In 2016-17, the Corporation Tax rate was 20%. Prior to April 2016, the rate depended on how much profit your company made. The current government has committed to keeping the Corporation Tax rate at low levels.
Value Added Tax (VAT)
You are obliged to register your business for Value Added Tax (VAT) with HMRC if your business’ annual revenue is over £85,000 or more (current 2018/2019 threshold) during any 12 month period.
Once you are registered for VAT, you need to add the current VAT rate, which is 20%, to your invoices. Once you deduct any VAT your company has spent during the VAT quarter, you then pay the balance to HMRC.
As a small business, if your VAT taxable turnover is less than £150,000, you may be able to benefit from the Flat Rate VAT scheme. This provides simpler accounting as you can apply a fixed rate of VAT and keep the difference between what you charge your customers and pay to HMRC.
There is also the ‘cash’ scheme which enables you to only repay VAT to HMRC once payment has been received by you.
Your accountant will be best placed to inform you which scheme most suits your business.
PAYE/ National Insurance Contributions
You or your accountant will be required to set up your company payroll. If you and your employees receive a salary then income tax and National Insurance Contributions (NICs) will be deducted and paid to HMRC on a monthly or quarterly basis.
If you don’t pay any salaries that go above the lower threshold for income tax or NICs, you must still notify HMRC that there will be no tax due for that period.
Apart from the taxes previously mentioned in which your limited company is liable to pay, you will also need to pay tax on any personal income – normally in the form of a salary or dividends drawn from your company. To settle your personal tax liabilities, you will need to complete a self assessment, together with payment of any taxes owed, by 31st of January following the end of the tax year.
Although your Limited Company Tax may seem complicated, if you ensure you create a good business plan, keep your paperwork organised and appoint an efficient accountant, this will make a huge difference to the success of your business.