Limited company tax UK

Introduction

We take a look here at limited company tax for an independent contractor. When you are contracting through your own company, you will have many different things to deal with every day. However, what tax does a limited company pay throughout the course of the year? There are a whole range of tax rates and tax allowances against different taxes. We will set out here how these apply to the taxes that a UK contractor’s company will pay.

UK companies have limited liability status. This refers to the extent that a company director or shareholder is responsible for the debts of the company. The most common type of company is a private limited company. Notably, most contractors and small business owners choose this type of company.

If you are about to set up your company for the first time, this taxes guide will be a useful overview for you. When we consider what tax does a limited company pay, primarily there are three main types of contractor taxes. However, it could be less if your business does not register for either VAT or PAYE.

Top tips

When you are a contractor, there are various ways that you can improve things for yourself. These include:

  • maximise your take-home pay
  • negotiating the best rate for your work
  • make sure that you do not pay any more tax than you need to

Two separate legal entities

When you are a contractor running your own company, the individual (you) and your company are in the eyes of the law, two separate legal entities. What’s more, your company’s money is not directly yours and therefore, you should not treat the company’s bank account as such. Key to note, it is important to keep track of your company’s finances as time goes by. What’s more, it is important that throughout the course of running your company, you do not find yourself in a position where your company cannot pay its tax liabilities.

Please note, your company will pay company tax on its profits. On the other hand, as an individual, you will pay income tax (and possibly NI) on your personal income. This will include the income that you receive from your company and any other sources.

Filing dates

In advance of reading the below, we have detailed all of the relevant filing dates. These are the dates that you may need to meet as both a company director and someone who files a Self-Assessment Tax Return. It is a good idea to make diary notes of these, in order for you to track which dates need meeting each year. Furthermore, one of the main responsibilities when you have your own company, is the filing of annual company accounts. A good accountant will take care of this for you. They will also look after the filing of official documents and let you know when to make take payments.

What tax does a limited company pay and the types of contractor taxes

Limited company tax –Corporation Tax (CT) 

The first type of company tax is Corporation Tax. This is payable by every company that makes a profit every 12 months. CT is the main tax within contractor taxes.

It makes sense to claim for all of your genuine business expenses, over the course of each year. This includes both rechargeable expenses to your client and non-rechargeable ones. Expenses help to lower your company’s profit. Therefore, they give tax relief which, in turn, reduces your company’s overall Corporation Tax bill.

Salaries are regarded as business expenses and these also help reduce CT. Therefore, from the outset, you should consider what your salary is going to be. In addition, you could also consider employing your spouse, if they are going to be helping you run your company.

When we look at what tax does a limited company pay, the main tax that all UK companies pay is CT on their profits for each accounting period. Each company has to have a financial year-end for filing and tax reasons. Therefore, if your company’s year-end was 30 September 2022, your company would pay CT on its profits for the year to 30 September 2022.

Corporation tax -further details

The current rate of Corporation Tax is 19%, and up to 31 March 2023 all companies pay this rate on their profits. In previous years gone by, large companies paid a higher rate of CT than smaller companies. 1 April 2015 was the date that HMRC lined up the rates for both small and large companies. Please note, following the March 2021 Budget, the Chancellor has confirmed an increase in the corporation tax (CT) rate from 19 to 25 percent, with effect from 1 April 2023. The 25% rate will apply to profits above £50,000 with marginal relief for profits of up to £250,000. This means that:

  • Profits up to £50,000 will pay Corporation Tax at 19%.
  • Company profits between £50,000 and £250,000 will pay 19% on the first £50,000 and 25% on the remainder.
  • Profits above £250,000 will pay 25% on all of the profits.

Once you register your company with Companies House, HM Revenue & Customs (HMRC) will also register it for CT.

CT payments are due nine months and one day after a company’s year-end. Therefore, in the example of your year-end being 30 June 2022, the CT would be due for payment to HMRC by 1 April 2023.

Your company might make gains when you sell any company assets such as stock, shares, property, etc. Capital Gains Tax is payable on the gain when you sell or ‘dispose of’ an ‘asset’ that has increased in value. Please also note, it is the gain that is taxable, not the amount of money that you receive. When a company makes gains, these are taxable at the same rate as CT. The tax on this is also payable to HMRC as part of the company’s overall CT bill.

Limited company tax –Value Added Tax (VAT)   

When we look at what tax does a limited company pay, another type of company tax is VAT.

Most contractors will register for VAT.

It is compulsory to register for VAT if your annual turnover is over £85,000. However, you can also opt to register voluntarily, if your turnover is under this.

When you are a VAT registered business, you will charge VAT at the current standard rate of 20% on your services or charges. The VAT that you receive from clients and customers is, in effect, paid over to HMRC each quarter.

If you are operating under the `normal VAT scheme,’ you can also recover any VAT that you incur on your costs and expenses. Any VAT that you pay out to suppliers is effectively reclaimable from HMRC each quarter. There is also the option to operate under flat rate VAT scheme. However, this is now less attractive for contractors due to the limited cost trader rule.

VAT reporting

You report the overall VAT to HMRC on quarterly VAT returns. The net difference between the VAT you charge on services and the VAT that you pay out on costs and expenses is payable over to HMRC. If you are due something back, this will be refundable by HMRC.

You can now submit VAT returns online through a compatible software provider, under the new Making Tax Digital rules.

VAT payments are due one month and seven days after the end of the VAT quarter. If you are paying by direct debit, you have an extra three days before the VAT payment goes through, i.e., it will go through one month and ten days after the end of the VAT quarter. Therefore, if your VAT quarter ended on 30 September 2022, the due date for filing the return and paying the liability by internet transfer would be 7 November 2022. If you pay by direct debit, HMRC would take the liability on 10 November 2022.

Limited company tax –PAYE / National Insurance contributions (NICs) on salaries     

When taking a look at what tax does a limited company pay, the third type of company tax is PAYE/NIC.

PAYE / National Insurance (NI) is payable to HMRC based on any salaries that a business pays to its employees. The employee will earn tax free pay initially and depending on their earnings, they may have income tax and employee National Insurance deducted. The employer may also, depending on the level of pay, have to account for employer’s national insurance.

The sum of the three amounts (PAYE income tax, employee and employer NI) are payable to HMRC, every month or calendar quarter.

PAYE periods run to the 5th of the month each month. The tax and NI are due to HMRC by the following 19th of the month.

A business can pay its PAYE/NI quarterly as opposed to monthly, if the total expected bill comes to less than £1,500 each month (£18K for the full tax year).

If your company only has one employee (you, the contractor) and you are drawing a salary just above the NI threshold, there is unlikely to be anything due to HMRC for the first three quarters of the tax year. A small amount of NI will then be due in the fourth and final quarter of the tax year.

Other considerations   

Unable to meet your company tax bills 

If you find at any time your company cannot currently meet your company’s tax liabilities, you should consider your options.

Personal tax on dividend payments    

There is no NI on dividends. As a director and shareholder in your own company, you will, however, need to pay personal tax on any dividend income that is not covered by your personal allowance or dividend allowance. Personal tax (on dividends and any other untaxed income) is payable to HMRC. The due date for payment of personal tax is 31 January after the end of the tax year (5 April) each year. Depending on your tax bill and income, you may also need to make payments on account of the following tax year.

Limited company tax –IR35     

One other type of contractor taxes that may apply is IR35. When you are a contractor in the UK, you should make sure you take the required steps to ensure that you are outside the rules that are called IR35. These rules originally came in to play in the year 2000.

To remain outside IR35, you could consider having your contract reviewed and improved by an employment law expert (e.g., Qdos). You could also consider taking out IR35 insurance and Qdos provide this too.

In recent times, the government has now shifted the responsibility of IR35 onto the service providers (recruitment company /client) in the private sector. This is already in place for the public sector. In the private sector, the service provider now needs to determine the IR35 status if they are a `large’ or `medium’ company. The shift does not apply to `small companies’ therefore if a contractor works for one of these, it is still their responsibility to determine their IR35 status and, as mentioned above, they can take steps to show that they are outside IR35.

Sole-trader / self-employed

When you are a sole trader, you have less responsibility in terms of the amount of filing you have to undertake with the authorities.

In most cases, you will pay your income tax and National Insurance via your Self-Assessment tax bill. If you are VAT registered, you will need to pay over VAT and if you run a PAYE scheme you will need to pay over any tax and NI that is due on your employees’ salaries.

Final thoughts

When you run your own private limited company, this is one of the most tax efficient vehicles to operate through. We cover here the types of company tax and how these taxes work. Therefore, when you operate your own company, you may need to pay some or all of these taxes, when you are in business for yourself.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 26th, 2021 / Categories: Company Taxes, First timer guide /

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