Limited Company Tax: The Basics

There are three different types of business structure you can choose for your company. All of these have unique tax requirements. While the type of business will also define other details, keeping the tax implications in mind can save you a huge amount of hassle. It can also improve your business’ profit margins. Especially if you choose to set up a limited company.

At Newnham & Son, we have years of experience filing limited company tax returns. Below, we’ll quickly compare sole traders, partners, and limited companies. We’ll also explain limited company tax requirements and what they mean for your business. Lastly, we’ll give you information on when you need to register for VAT.

Comparing Sole Traders, Partnerships, and Limited Companies

Before going into the specifics about limited company tax rates, it’s important to understand the different business structures. The three types of business formats available in the UK are: 

• Sole traders
• Partnerships
• Limited companies

The majority of small businesses in the UK and registered as sole traders. In this structure, business owners are held responsible for all debt incurred. Plus, they also need to take care of their own accounting. If you are starting a business with someone else, a partnership can help you share responsibilities with other shareholders.

Finally, a limited liability company setup will allow you to keep personal and business finances separate. Business owners that choose this structure just have to be aware that there are more management and reporting requirements. With this in mind, you may benefit from working with a local accountant.

What is Limited Company Tax?

In simple terms, the main difference between the three business structures is how much tax you pay. The structure also depends on the amount of control you have over the company and its profits.

Limited companies have to pay corporation tax on all of their profits. However, they are also allowed to subtract any reliefs they qualify for. At the time of writing this article, the UK limited company tax is currently set at 19%, although this number will decrease to 17% in 2020. You’ll have to pay personal tax and NICs at 13.8% for all employees that have weekly wages surpassing £166. 

As a company shareholder, you’re entitled to pay yourself dividends from the available cash. Shareholders don’t pay tax on the first £2,000 of dividend payments, but you do have to pay tax on anything more than that. Payable rates for dividends is defined by the income tax band, where the basic rate is 7.5%, the higher rate is 32.5%, and the additional rate is 38.1%. Remember, dividends that fall within your Personal Allowance are not part of your £2,000 dividend payments.

How Does It Affect Your Company?

All companies must pay their limited company tax no more than nine months and one day after the end of their specific accounting period. Keep in mind that companies that make more than £1.5 million can set up instalment payments as well. Not only this, but either you or your accountant should file a limited company tax return within 12 months in order to determine how much of it is payable.

When Should You Register for VAT

When the gross year-to-date turnover of the VAT-able goods you own reaches £85,000, it’s time to register for VAT. After successful registration, you should receive a certificate with your VAT number, the date you registered, and the date on which you’ll need to make your first value-added tax payment. In most cases, VAT is 20% but there are some products and goods that are subject to just 5% or completely exempt from this tax.

Learn More About Limited Company Tax By Contacting Your Local Accountant

Learning about different business structures is extremely important if you want to choose the best setup for your company. Limited company tax requirements are favourable for larger businesses that are growing quickly and have owners who prefer to keep their personal and professional finances completely separate.

To improve your chances of success, you should work with a local accountant that understands your business, stays up to date with the most important changes, and keeps your finances in order. If you are looking for a local accountant that can help keep your limited company tax in order, get in touch with Newnham and Son. Our team will be glad to help!