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Individuals working in the contracting industry under an umbrella company are used to paying Income Tax and National Insurance Contributions (NICs) through PAYE on their gross earnings.
However, if you're a contractor considering starting a limited company, or a pre-existing business owner, how do things change and what other taxes do you need to consider?
It’s a UK tax that limited companies need to pay on their profits.
Profits are likely to consist of ‘trading’ profits from doing business (income less expenses), income from any investments it has and any gains it may make from selling assets such as land and property, equipment and machinery.
If your company is making taxable profits, you'll need to pay Corporation Tax. You can, however, ensure that the tax bill is kept as low as possible by taking a few simple steps:
Make sure you claim all business expenses.
Payments into your pension scheme are usually an allowable deduction for corporation tax.
Certain capital expenditure made by your company may be eligible for Capital Allowances which will reduce taxable profits.
The rate of Corporation Tax payable by companies with annual profits of less than £50,000 will be 19%. Companies with annual profits above £250,000 will pay Corporation Tax at a rate of 25%, and companies with annual profits between £50,000 and 250,000 will be entitled to a marginal relief which will mean an effective corporation tax rate between 19% and 25% depending on the level of annual profits generated.
The tax is applied to the profits made on the company’s accounting period. This is usually in line with the company’s financial statements and annual accounts. Most businesses have a 12 month accounting period (it can’t be longer than 12 months).
New companies need to be registered for Corporation Tax within 3 months of starting to trade.
This will include buying and/or selling goods or services, advertising, renting business premises, employing someone etc. Please note that if you don’t register by the deadline your company can face a penalty.
Corporation Tax is a self-assessed tax and a Return needs to be filed with HMRC together with the company’s accounts. Even if your company is loss-making and no Corporation Tax is due, you still need to file your Return and accounts.
The deadline to file the return is 12 months after the end of the accounting period it covers. However, you’ll need to prepare your Return earlier in order to work out what Corporation Tax to pay in time for the payment deadline!
Yes. Dividends are paid out after Corporation Tax – what is known as an 'after-tax' distribution.
The Corporation Tax bill has to be paid 9 months and 1 day after the end of the accounting period for your previous financial year. For example, if your accounting period ends on 31 March 2023 (31 March is a common period end), your Corporation tax payment deadline is 1 January 2024. Your Return filing deadline would be 31 March 2024. HMRC has a flexible range of accessible online payment methods.
No. Because it is a levy on the profits made by a company rather than an expense incurred in making those profits.
Examples of allowable Corporation Tax expenses you may be able to claim include mileage, accommodation, salaries, training, advertising and business insurance. The rule is that such expenses need to ‘wholly and exclusively for the purposes of the trade’. So, no private or personal expenditure will be allowable.
Purchases of business assets needed to run your limited company, like vehicles, machinery and equipment will be classified as capital expenditure and not directly deducted in calculating profits but may be eligible for capital allowances of up to 100%.
Simple ways in which to legitimately reduce Corporation Tax liabilities include:
Ensuring all your business expenses are recorded and included.
Pension payments made by the company on behalf of a director are deductible and should not be overlooked.
Paying dividends doesn’t reduce Corporation Tax liabilities but is an efficient way in which to extract money from the company.
Claim Capital Allowances for all major, eligible asset purchases.
If your company is working on contracts which are outside IR35 then you’ll pay Corporation Tax on the profits the company makes. However, if you have work which is inside IR35 you can choose to perform that work as, for example an umbrella employee. This income would not pass through your limited company since the Umbrella will pay you directly as their employee.
Should you choose to work inside IR35 through your company, although PAYE and NICs will be deducted from the payments made to it for that work, the income, and the tax/NICs deducted from it will be deemed to be a legitimate business leaving no profit and thus no Corporation Tax payable.
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