How much tax does a limited company pay?

How Much Tax Does a Limited Company Pay?

One of the most frequently asked questions by new business owners is how much tax does a limited company pay? This handy guide has featured in Consultants 500 and will also set out the various types of tax a company has to pay and what that entails.  

First, a word about what a limited company is. They’re a distinct legal entity, thus the financial affairs of a company and its directors are completely separate, unlike sole traders.  

If you are registered as a company director, you are the person who is ultimately responsible for understanding how your business is taxed. You are also responsible for registering the company, and you’re also the one who has to pay Corporation Tax and any payroll related taxes. 

What are the different taxes a limited company has to pay? 

It can help to have a shot summary, that explains the various types of taxes, and how much needs to be paid every year.  

1. Corporation Tax 

Once a new company has been created, the HMRC will automatically send a form to you, to register to pay Corporation Tax. This must be completed within three months of starting to trade.  

When your business is up and running, once a year it is liable to pay Corporation Tax on the profits it has made 

Corporation Tax is a tax on the profits that have been made during the year and not on it’s turnover. Any company, regardless of its size has to pay the same rate of tax.  

An accountant will submit your annual accounts data to HMRC, usually via a CT600 form. Tax owed must be paid within nine months and a day of the company’s year-end.  

In 2019, the Corporation Tax rate is 19%. By 2020, it will be reduced to 17%.  

2. Value Added Tax (VAT)

VAT is a tax charged on pretty much all UK products. However, it is different from other taxes as it is the company itself who collects it on behalf of HMRC. The Government does not collect this directly.  

However, if your company only has a turnover of £85,000 or less, then you do not need to worry about VAT. You can still choose to pay it if you wish, but it is not a requirement.  

A company with a turnover of more than £85,000 must be VAT registered.  

Registering for VAT can be beneficial, as it allows you to deduct the costs of day to day expenses from your business.  

When you pay VAT, there are a couple of different options. You can use the traditional method of working out the amount from each individual transaction made, or you can instead apply a flat rate across all turnover your company makes.  

Which option you choose depends on the type of business you run. It’s fair to say that VAT Laws are complex and it’s worth chatting to your accountant about this, who’ll be able to look at your business profile and suggest the right VAST scheme to register for.  

3. National Insurance (NI)

National Insurance Contributions (NICs) are due on the salaries paid to any company employees and are collected by the employer and paid to HMRC either on a monthly or quarterly basis.  

Class 1 contributions are paid by both the employer and employees. They’re paid on income higher than the prevailing minimum thresholds. The percentages for these are worked out as follows: 

In 2018/19, Employers’ National Insurance is levied at: 

• 13.8%, on salaries that are over £162 per week.  
• 12% between £162-£892 per week 
• 2% over £892 per week. 

If your company is eligible, the first £3,000 of Employers’ National Insurance contributions can be written off. This is due to the Employment Allowance tax incentive. 

4. Income Tax 

In the 2018/19 tax year, personal allowance is £11,850. Personal allowance is the amount of income you can earn tax free. 

Once you earn more than this figure, all employees and any directors that take a salary are required to pay varying rates of income tax. This is dependent on their overall annual income.  

The income tax bands are  

• Basic (20%) 
• Higher (40%) 
• Additional (45%) if you earn £150,000 or more. 

A great deal of company owners decide to pay themselves small salaries. These will have low levels of both income tax and National Insurance. Most of their income might come from dividends, which we’ll explain a bit more about next.  

5. Dividend Tax 

Tax must be paid on any dividends received during each tax year. After April 2016, dividend tax changed in a big way.  

Before this time, a system of tax credits was in place. These were used to compensate shareholders for the fact that Corporation Tax had already been paid on company profits. 

Rates of dividend tax are: 

• Basic 7.5%  
• Higher 32.5%  
• Additional 38.1%  

This is according to which income tax band your dividends fall into. The first £2000 of dividends are included in a dividend allowance. These are not taxable. However, overall income isn’t reduced by £2000 for tax purposes, which is seen as a weird quirk in the system!  

Contractor Unlimited Can Help With Tax and Accounting 

Tax obligations can really seem like a bit of a scary undertaking, with so many rules and regulations in place to keep things legal and above board. Keeping on top of paperwork and accounting can be a stressful task, and that’s why it’s important to leave this to the professionals who can make the job much easier for you and explain everything in clear terms. 

If you’ve been thinking about hiring a bookkeeper or business accountant to help you with your company tax, then there’s never been a better time to contact Contractor Unlimited. We’re experienced and reliable in our field and can work with you to make sure you’re tax compliant.  

For more information, help and assistance on company tax, contact us today, or take a look at our website. We’d be happy to discuss any concerns or issues you might have.