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Limited companies are separate legal entities from their directors, so your limited company will pay taxes on its profits, and you (as an individual) will be liable to pay tax on any income you receive from your company. Here we cover the basics and go into detail about the taxes you will be liable for.
Corporation Tax (CT)
Corporation Tax is the most important tax liability for limited companies. This is a levy on your company’s profits, (the money that is left over once your business expenses and salaries have been deducted from your turnover).
What else is subject to Corporation Tax? :
- Trading profits
- Profits from investments
- Capital gains
How is Corporation Tax calculated?
It is calculated and paid annually based on your ‘Corporation Tax accounting period’, which is typically the same as your company’s financial year. Not to be confused with your associated Company Tax Return, your Corporation Tax deadline is earlier and you only have nine months to pay any tax due.
Value Added Tax (VAT)
Most contractors running their own Limited Company are registered for VAT. VAT is applied to all services you provide to your contracting clients, and you can reclaim VAT on purchases you make via your company (subject to the conditions of any special VAT scheme you join). The standard rate for VAT (which you charge to your client) is 20%.
How is VAT paid?
VAT is paid each quarter, and you will need to submit an online VAT return to HMRC together with an electronic payment, or you can opt to pay via direct debit.
Different types of VAT schemes
Along with the standard VAT scheme, there are other Vat schemes offered by HMRC which may be more suitable for your limited company.
The Flat Rate VAT scheme has numerous benefits besides being simpler to operate, and allows companies to pay HMRC back a flat rate percentage of turnover rather than having to account for every transaction individually.
The Cash Accounting scheme enables limited companies to only record transactions once they have actually been paid, rather than when they are invoiced.
You can find out more about the different schemes available to you by requesting more information from our team of chartered accountants here.
Employers’ National Insurance Contributions – contractors will need to pay this on all salaries paid to their staff.
Employees’ National Insurance Contributions – as an individual, you are liable for this on the salary you draw down from your limited company.
Many contractors pay themselves a low salary, sometimes below the NIC threshold, to minimise their exposure to both income tax and NICs. Your accountant can help you set your annual salary.
More detailed information on paying yourself a salary is featured further down in this guide.
As a company shareholder, you will also pay tax on the dividends your company announces. Unlike salaried income, dividend income is not subject to NICs, providing limited company owners with a significant tax benefit.
Your company will pay you a ‘net’ dividend, which is then multiplied by 10/9 to provide the ‘gross’ dividend amount upon which your tax portion is calculated.
You want to pay a dividend of £900. Divide £900 by 9, which gives you a dividend tax credit of £100. Pay £900 to the shareholder – but add the £100 tax credit and record a total of £1,000 on the dividend voucher.
From April 2016, you’ll receive a dividend allowance of £5000 in addition to your personal allowance. You’ll then be taxed at 7.5% up to the higher rate tax threshold, 32.5% as a higher rate tax payer and 38.1% at the additional rate.
Income Tax / Self-Assessment
As a director, you will need to submit your income tax via the annual self-assessment process. Submission deadline is the 31st January each year, together with payment. You may also have to make two payments on account (31st Jan and 31st July) towards the current year’s tax liability. The payment on account amounts assume that you will earn the same income this year as you did in the previous tax year.