In this article we’re going to take a look at the various taxes you will be liable to pay as a limited company, and when you have to pay them.
Being the owner of a limited company comes with certain financial responsibilities; registering to pay tax on your company income and ensuring that any liabilities are paid to HMRC on time.
We’re going to take a look at the various taxes you will be liable to pay as a limited company, and when you have to pay them. In this article we’re going to cover company taxes specifically, but it’s also important to be aware of the personal taxes that may apply to you as the director of a limited company. We’ve covered these in a separate blog, here.
Let’s start with Corporation tax as it’s the simplest. Corporation tax is paid on your limited company profits, so if this is your first limited company you won’t have seen it before.
It’s just one flat rate that applies to every company, of all sizes. It doesn’t include a tax-free allowance and doesn’t vary depending on how much you earn. It’s a 19% deduction that’s applied to your company profits at year end.
It’s also worth noting that the government plans to reduce the rate to 17% for the 20/21 tax year.
Once the annual revenue of your company reaches £85,000 within a one year period you will need to register for Value Added Tax (VAT), a tax paid on most goods and services.
Once you’ve registered you will need to start charging VAT on your sales, but you can also can reclaim VAT on purchases.
This needs a bit of thought because you have to decide whether to increase your price to charge the VAT onto your customers, or keep the prices the same and pay the VAT yourself - reducing your profits. If your customers are businesses and mainly VAT registered it’s easier to charge VAT on because they are likely to be able to claim it back. However, if your customers are not businesses and aren’t VAT registered, the increase in price could have a negative impact your sales.
Managing VAT is where it can start to get slightly complicated as there are a few different rates and VAT schemes to be aware of. It requires careful record-keeping of all transactions and the rate of VAT they were charged at.
Starting with the standard VAT rates, outlined below.
You can see a full list of VAT rates on different goods and services here.
Then there is the Flat Rate Scheme, which works slightly differently to the standard VAT scheme. Instead of paying VAT on your sales and then reclaiming it on your expenses, you pay a fixed percentage on your gross sales (sales inclusive of VAT) based on the sector you work in.
The caveat to this is that under the Flat Rate Scheme you can’t reclaim the VAT on your expenses except for certain capital expenditure of goods over £2,000 (inclusive of VAT).
It’s also worth checking if you are a limited cost business. If so, a flat rate on income will be applied at 16.5% instead of the rate being dependant on your business sector.
To enrol on the flat rate scheme your anticipated revenue must be £150,000 or less. If your annual turnover exceeds £230,000 (inclusive of VAT) you will have to move to the standard accounting scheme.
If your company is taking on members of staff, it’s important to remember that as an employer you have certain obligations. You are responsible for deducting income tax and National Insurance from your employee’s wages and paying the amounts deducted to HMRC each month.
This table shows how much employers pay towards employees’ National Insurance for the 2019 to 2020 tax year.
We'd always recommend talking to an accountant to make sure you're paying the correct amount of tax. They will be able to advise on your specific situation and with a view on what’s best for your business.
If you already have one, you can share access to your Coconut account with them through the Coconut Accountant Portal. But if don’t yet have one, you can speak with one through our Integrated Partner Programme. Book a call with our team today to find out more.
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Take a look at the limited company tax rates for 2021/22 as well as our tips to help you with the new tax year.