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What tax does my limited company have to pay?

If you’re planning to set up and run your own business through a limited company, then one of the most important questions we are often asked is; what taxes will I be faced with as a limited company director?

Before we answer that question, it’s important that you understand that a limited company is a separate legal entity. You might own it as the only shareholder and director, but it is a business in its own right. It isn’t a sole trade or a partnership and you, as a working director, will be its employee.

Corporation Tax

As a company it will be subject to Corporation Tax (CT) on the profits it makes each year. Profits are based on income received less business expenditure incurred, subject to certain accounting and tax rules. Your company will need to complete a Tax Return and paythe tax due 9 months and 1 day after the end of its accounting period. The corporation tax rate starts at 19% for small companies and rises up to 25% for companies with higher profits.

 

PAYE and NICs

As a director you are probably receiving a salary in which case the company is responsible for deducting the correct PAYE tax and Employee's National Insurance Contributions (NIC) from that salary along with paying any Employer National Insurance Contributions which are payable at a rate of 13.8%. This tax/NIC must be paid over electronically each month to HMRC.

 

Value Added Tax

If your company’s turnover exceeded £85,000 for any 12 month period it may have had to register for and charge VAT of 20% on goods and services. It has to account to HMRC for this ‘output’ tax less any ‘input’ tax it has incurred on the expenses of delivering those services. The company’s VAT returns are made digitally each quarter.

 

Dividends

One way to reward directors who are also shareholders is to pay them a dividend. A dividend isn’t deductible from company profits but is taxable on the recipient. Personal tax payable on dividends is charged at a lower rate than earnings and is not subject to NICs.

Limited company tax FAQS

Below are some of the most frequently asked questions that our PayStream clients have asked about limited company taxes:

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The tax rule is that the expenditure must be ‘wholly and exclusively for the purposes of the trade’. Expenditure on items which are for mixed private and business use won’t be allowed. Money spent on capital items like buildings and vehicles aren’t allowed as deductions from profits but may be eligible for separate tax allowances called ‘Capital Allowances’.

If your company has made a loss that loss can usually be carried forward to be set against profits it makes in later years or carried back against profits made in earlier years.

Yes, but you must register the company voluntarily first before you start charging VAT. You should take advice from a reputable accountant about whether registering for VAT is appropriate unless your company meets the obligatory registration threshold in which case registration will be compulsory.

No, you can use any one of a number of payroll software packages which meet HMRC requirements. However, it is advisable to outsource this to someone, payroll software can be expensive as well as any mistakes made or filings missed in processing payroll can be costly.

At what rate are dividends taxed?

There is a £2000 0% dividend allowance and then depending upon your rate of tax, dividends are taxed as follows:

Basic rate taxpayer - 8.75%

Higher rate taxpayer - 33.75%

Additional rate taxpayer - 39.35%

Yes. The cost of the van is likely to fall under the Capital Allowances rules. Check with your accountant that it will qualify.

If your company is not VAT registered you will not be able to claim VAT back on these expenses however your business will be able to claim the gross cost of the business purchases against the company’s income for Corporation Tax purposes.

No. You don't have to trade through your company. Please note that you may still have ongoing statutory obligations, for example annual filing the Confirmation Statement and statutory accounts to Companies House will still be necessary. You should ask your accountant for advice. 

A good accountant will be able to offer your company tailored business advice on a range of matters, such as payroll, help with preparing its annual accounts and advising you on your tax filing deadlines. Whatever your requirements, PayStream has a range of accountancy services designed to give you everything you need, and nothing you don't.

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