If you’re setting up a limited company and are confused about how much money that you should set aside for tax payments, or want to make sure that you’re on track with your existing business, read on for a full answer on just how much tax limited companies pay.
Setting up a business is an exciting time. It’s an opportunity that offers plenty of freedom to be your own boss and make your own decisions but there are still some rules that you will need to follow, particularly those surrounding tax. Tax is a financial cost that is payable by all businesses to HMRC, and the specific amount that you will owe is calculated based on your business profits, losses, and the type of company that you own.
To help you to keep on top of the tax payments that limited company owners should be aware of, and to understand how much you should aim to set aside to settle your tax bill each year, we will break down what kind of tax limited companies need to pay below.
Our simple overview of the following taxes will leave you free to put your time, effort and energy into building your business and enjoying the fruits of your labour, rather than worrying about tax.
- Corporation Tax
- Value Added Tax (VAT)
- Employer National Insurance Contributions
- Personal tax payments for limited company directors
What Is Corporation Tax?
Corporation tax is the main tax that limited companies need to pay. Unlike sole traders, limited companies do not pay any income tax or national insurance but instead they do pay corporation tax on business profits, less any allowable expenses.
Corporation Tax is applied to limited company profits after salaries and other allowable business expenses have been paid, but before dividends are withdrawn.
How Much Corporation Tax Will I Pay?
The current rate for corporation tax in the financial year 2021/22 is 19 percent. What that 19 percent tax actually equates to in money owed to HMRC by your business will depend on the level of profits made by the company at the end of the tax year.
Unlike the income tax which is paid by sole traders and PAYE employees, corporation tax doesn’t include a tax-free allowance and doesn’t have a scale of ascending charges based on how much you earn. Any, and all profits made will be due a 19 percent corporation tax deduction
For example; If at the end of the tax year your limited company has earned £100,000 and accumulated allowable expenses of £30,000, the business profits would sit at £70,000.
19% tax on profits of £70,000 would equal a sum of £13,300 being owed to HMRC.
There can be different levels of corporation tax due for smaller and larger companies so you should always check the up to date tax rate with HMRC. For 2021/22 both small companies with profits up to £300,000 and larger companies with profits of £1.5 million or more have the same 19% corporation tax rate.
How Do I Pay Corporation Tax And When Is It Due
Limited company owners must submit an online CT600 form to HMRC annually. This form provides a breakdown of the company’s income minus any tax allowances and expenses in order for HMRC to calculate how much corporation tax is owed.
The total corporation tax that you owe must be paid no later than nine months and one day after the end of your company’s accounting period ends. Limited companies have the choice of when to set their accounting year end date but once it is set, it must be the same every year.
The corporate tax owed can be paid online via your HMRC account using a company credit card, business bank account or direct debit.
What Is VAT?
VAT is the second largest tax that some limited companies have to pay. VAT stands for value added tax and it is a charge added to the price of most goods and services in the UK. When companies are VAT registered it means that they must charge VAT to their customers but can also reclaim the VAT that they have paid on business expenses and purchases.
When should I Register for VAT?
Not all limited companies are registered for VAT but if you are likely to turnover £85,000 or more during any 12 month period then you are required to register your company for VAT with HMRC. In March 2021, the Chancellor advised that the current VAT thresholds shown below will be in place until 31st March 2014.
|2021/22 Tax Year||2021/22 Tax Year|
|VAT Registration threshold – The level of revenue at which you must register for VAT||£85,000||£85,000|
|VAT Deregistration threshold – The level of revenue at which you must register for VAT||£83,000||£83,000|
There are several types of VAT schemes available, including those that encourage you to register even if you are under the current VAT thresholds, and those that offer a flat rate payment. If you are at all uncertain about whether your business should be registered for VAT, an accountant will be able to advise you and confirm which VAT scheme is the best suited to your company and it’s finances.
How Do I Pay VAT And When Is It Due
Limited company owners should pay their VAT bill quarterly from the date of their company’s registration. VAT returns must be submitted, and monies owed paid to HMRC no later than 37 days before the end of each quarter. Even if you have no VAT to pay or reclaim in a given quarter, limited companies that are VAT registered must still submit a quarterly VAT return.
Your VAT bill will be the total amount of VAT charged to your customers, usually at the standard rate of 20%, minus any VAT payments that the company has spent itself. The balance is the sum of the VAT payments owed to HMRC.
To work out how much VAT to charge on goods and services or to calculate how much VAT you have spent on business purchases, HMRC has a handy tax calculator here. Knowing these calculations will be invaluable for keeping accurate income and expenditure records for the business accounts.
Employers National Insurance Contributions
There are several different types of National Insurance payments depending on whether you’re an employee, sole trader or company director. We cover employer contributions here and director contributions later in the article.
Employers are required to pay National Insurance Contributions on their employees’ earnings and benefits as well as being responsible for collecting employees’ Class 1 National Insurance contributions and income tax deductions through their PAYE system.
If you operate a limited company with staff on its payroll, you will need to pay ‘secondary’ class 1 National Insurance Contributions on your employees earnings. Primary contributions are deducted from the employee’s pay at source through PAYE.
The secondary contribution amounts due are currently 13.8% on all earnings over the secondary threshold for almost all employees except for staff under 21 and for apprentices under 25.
- 2021/22: £170 per week, £737 per month or £8,840 per year;
- 2020/21: £169 per week, £732 per month or £8,788 per year.
Check the latest NIC rates here.
Employer NICs are also payable on some employee benefits but reimbursed expenses such as work related travel and subsistence, subscriptions and business entertainment expenses are exempt from tax and NICs.
Where limited companies pay expenses or offer benefits that are not exempt from National Insurance liability, or provided under a salary sacrifice scheme, they are reported via monthly payroll or declared on a P11D form at the end of the tax year.
Personal Tax Payments For Limited Company Directors
Corporation Tax, VAT and Employer National Insurance Contributions are the three biggest taxes that limited companies are required to pay but it doesn’t stop there. Company directors should also be aware of their personal tax liabilities that come from taking a salary and withdrawing dividends as a director of a limited company.
In order to build up a full picture of the amount of tax limited companies pay, company directors should consider both the business and personal streams of tax that they are required to pay in any given accounting year.
Personal tax payments include:
- Income Tax
- Dividend payments
- National Insurance Contributions
- Capital Gains
Income Tax For Company Directors
As a company director, you need to be aware that Income tax is paid on some of the income you personally receive from your limited company. This includes your salary, dividends and rental income.
If you are taking a salary via a payroll scheme then income tax and National Insurance Contributions are payable when the salary falls above the personal taxable allowance. These payments will be deducted at source and paid to HMRC through the company’s PAYE scheme on a monthly or quarterly basis along with the payments due for your employees.
A dividend is a share of the company’s profits that is paid to its shareholders. A shareholder is any one that owns all or part of a company. Company directors must complete a self assessment tax return every year to declare the dividend payments that they received so that any tax due to HMRC can be calculated and paid.
Tax Free Allowances And How Much You Pay
Company owners do not pay tax on any dividend income that falls within their personal allowance and just like income tax, everyone has a tax free dividend allowance too. This means that you only pay tax on dividends received if the total payments exceed the dividend allowance set by HMRC. For 2021/22 the dividend allowance is set at £2000, so only dividends above this amount are due to be taxed.
The actual amount of tax you will need to pay on dividends depends on your tax band and dividend allowance. Your tax band can be calculated by adding your total dividend income to your total salary for the year. The total will indicate the level of tax payments owed.
Find out more about income tax and dividend thresholds here.
How And When Do I Pay Personal Tax Owed
The deadline for filing and making payments of personal tax owed to HMRC is 31st January every year. This is done via a self assessment tax return. Company owners should also be aware that if the amount of tax they owe is over a certain amount, then they will be required to make a payment on account.
Payment on account is an advanced payment towards your next tax bill. The amount due is based on a percentage of the total tax owed for the current tax year that you are filing for. Any one submitting a self assessment tax return should be aware that this advanced payment will increase the amount of money that you will need to set aside to settle your personal tax bill.
Related Questions: Do I Need An Accountant?
Most limited companies will have an accountant to manage their payroll, accounting records, employee and personal tax payments, but this isn’t a requirement.
Ultimately, the decision on whether to hire an accountant or not is yours. This will likely depend on how comfortable you are meeting the reporting needs of HMRC on top of your day job. Like any business decision it’s important to weigh up the cost of hiring an accountant vs the benefit they offer.
Due to the accurate and extensive records that you are legally required to keep as a limited company owner and the time this can take, you may decide that hiring an accountant would be beneficial.
Accountants can speak to HMRC on your behalf so if you’re looking to save time, enjoy the benefits of tax efficiency and ensure employee pay is handled correctly then you may find it easier to outsource your accounting needs to a qualified accountant.
Corporation Tax, VAT and Employer National Insurance Contributions are the three biggest taxes owed by limited companies. Directors of limited companies will also need to settle their personal tax obligations on top of this via a self assessment tax return submitted to HMRC each year.
The specific amount of tax your limited company and the directors within them will pay will depend entirely on the size of business turnover, profits, expenses and number of staff on payroll. The amount of tax owed can be reduced if you are smart about the amount of salary and dividend payments that directors take from the business but it’s important to ensure that you stay on top of your tax obligations whilst remaining tax efficient, which is where a qualified accountant comes into their own.