I take a look here at limited company taxes. If you are about to set up your company for the first time this guide will be a useful overview for you. Primarily there are three main types of tax but it could be less if you do not register for either VAT or PAYE.
When you are a contractor, there are various ways that you can do to improve things for yourself. These include:
- maximise your take-home pay
- negotiating the best rate for your work
- making sure you claim for all genuine business expenses
- and make sure that you do not pay any more tax than you need to
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! Therefore, you should ensure that you keep track of your company’s finances. What’s more, it is important that throughout running your company, you do not find yourself in a position where your company cannot pay its tax liabilities.
That is until it pays you salary or dividends.
Your company will pay company tax on its profits. You will pay income tax (and possibly NI) on the income that you receive from your company and any other sources.
In advance of reading the below, I 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.
The types of company taxes
Corporation Tax (CT)
The first type of limited company taxes is Corporation Tax. This payable by every company that makes a profit.
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 tax bill. Salaries are also regarded as expenses and these also help reduce company tax. 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.
All UK companies pay CT on their profits each year. Each company has to have a financial year-end for filing and tax reasons. Therefore, if your company’s year-end was 30 June 2021, your company would pay CT on its profits for the year to 30 June 2021.
The current rate of Corporation Tax is 19%, and in 2021 all companies now 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%, profits between £50,000 and £250,000 will pay 19% on the first £50,000 and 25% on the remainder and 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 2021, the CT would be due for payment to HMRC by 31 March 2022.
You might make gains when you sell any company assets such as stock, shares, property, etc. Capital Gains Tax is payable on the profit 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.
Value Added Tax (VAT)
Another type of limited company taxes is VAT.
Most contractors will register for VAT.
It is compulsory to register for VAT if your annual turnover is over £85,000, but you can also opt to register voluntarily.
When you are a VAT registered business, you will VAT at the current standard rate of 20% to your services or charges. The VAT that you receive from clients 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.
You report the VAT to HMRC on a 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.
PAYE / National Insurance on salaries
The third type of limited company taxes is PAYE/NIC.
PAYE / National Insurance is payable to HMRC every quarter for most contractor companies. If there is only 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 will be due in the fourth and final quarter of the tax year.
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 what are your options.
Personal tax on dividends
There is no NI on dividends. As a director and shareholder in your own company, you will, however, 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 is 31 January after the end of the tax year (5 April) each year. You may also need to make payments on account of the following tax year.
One other type of limited company tax 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 some rules called IR35. These rules originally came in to play in the year 2000.
To do this, 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.
The government is now shifting the responsibility of IR35 onto the service providers (recruitment company /client). We need to keep our eyes on any latest developments here as we move along.
I explain here the types of limited company taxes. Your company may need to pay some or all of these when you are in business for yourself.
Link to Contractor Advice UK group on LinkedIn https://www.linkedin.com/groups/4660081/