Limited company tax: what do I need to pay?
Before forming a limited company, you’d be wise to ask yourself the question ‘What taxes do I need to pay?’ because it’s considerably different to the tax you’re required to pay as a sole trader, writes Troy Stevens, director of contractor accountancy firm QAccounting.
Yet that’s not to say that you necessarily pay more tax when working through your own limited company - far from it. As the director of a limited company, you actually have the potential to pay less tax due to the flexibility this vehicle offers. That said, there are a number of taxes that, legally-speaking, you must settle annually.
So if you’re thinking about ‘going Ltd’ (becoming a Limited Company), or have recently done so, we’ll explain here exclusively for ContractorUK readers the taxes you’ll need to pay, when working through your company.
Corporation Tax
Every limited company in the UK must pay Corporation Tax (CT) which is an annual tax paid on profits, typically within nine months and one day after the date on which your company was created.
The current rate of CT is 19%, but this is set to drop to 17% from April 2020, as the government looks to incentivise small business ownership.
Given that CT is paid only on the profits your company makes, by making the most of legitimate business expenses, you will be able to reduce your Corporation Tax bill.
Pay As You Earn (PAYE) and National Insurance Contributions (NICs)
If, like many limited company freelancers and contractors, you pay yourself through a combination of salary and dividends, you might not need to pay Pay As You Earn (PAYE) and National Insurance Contributions (NICs) to HMRC, given that an accountant will typically advise you to draw a salary under the corresponding threshold, to achieve greater tax efficiency.
Depending on your tax code, the maximum salary you can withdraw before it becomes taxable is:
- £8,632 a year for Employee/Employer National Insurance, and;
- £12,500 in relation to PAYE.
If you pay yourself anything over these amounts as salary in one financial year, then you will be required to pay PAYE and Employer and Employees NICs on income and benefits.
Assuming you choose to take a salary under the tax threshold and top up your income through dividends, you still need to file payroll to HMRC every month. But an accountant can easily take care of this for you.
Value Added Tax (VAT)
If your limited company turns over £85,000 or above in a 12-month period, then you’ll need to register for and pay VAT (Value Added Tax). It’s a tax placed on the sale of many goods and services, but one that you can often claim back.
The current standard VAT rate is 20%. This means that you need to add VAT on every invoice your company sends. You’ll also pay it on most things you buy for your company. Each quarter, you’re required to calculate your VAT return and pay HMRC.
Many contractors choose to engage the help of an accountant, who can calculate this payment and make it on your behalf, now digitally -- as a result of the government’s Making Tax Digital initiative.
Self-Assessment
While the annual Self-Assessment is a personal tax and not part of your limited company, the amount you’ll need to pay HMRC will depend on the taxable figure that you’ve withdrawn from your limited company.
As you might already know, the Self-Assessment deadline is January 31st and takes into account personal earnings in the previous tax year. So, for example, the upcoming 2020 Self-Assessment is for personal income earned in from April 2018 to April 2019.
The tax bands for personal income depend on whether you live in Scotland or England & Wales:
Scotland
| Band | Taxable income | Scottish tax rate |
|---|---|---|
| Personal Allowance | Up to £12,500 | 0% |
| Starter rate | £12,501 to £14,549 | 19% |
| Basic rate | £14,550 to £24,944 | 20% |
| Intermediate rate | £24,945 to £43,430 | 21% |
| Higher rate | £43,431 to £150,000 | 41% |
| Top rate | Over £150,000 | 46% |
England & Wales
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,500 | 0% |
| Basic rate | £12,501 to £50,000 | 20% |
| Higher rate | £50,001 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
It’s also worth bearing in mind the tax thresholds for dividends, which we’ve detailed below. Dividends received over the (current) annual allowance of £2,000 are taxed at the following rates:
| Tax band | Tax rate on dividends over your allowance |
|---|---|
| Basic rate | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.1% |
If your tax liability for the previous tax year exceeds £1,000, then HMRC requires you to make ‘Payments on Account’ for the current year based on the previous year’s tax liability. This involves making estimated payments on January 31st and July 31st, with any balancing amount made when the tax return is submitted on the following January 31st.
Other considerations
In additional to the above, your company might need to pay several other taxes, including Capital Gains Tax (which occurs on any assets your company has sold in that tax year), and Entrepreneur’s Relief (which allows for a reduced tax rate if you sell shares in your business).
Given that tax can be complicated and time-consuming, many limited companies seek the support and advice of an accountant to help them make sense of their tax affairs and ensure they are operating compliantly, but also tax-efficiently. As there are many ins and outs when it comes to limited company taxation, it’s a consideration we strongly recommend you make!
