What Taxes Does a Limited Company Pay? A Complete Guide

Many limited company directors understand the challenges of managing their company’s tax liabilities. Also, HMRC regulations can often feel confusing and complex

So, it’s essential to learn about what taxes does a limited company pay to plan effectively and comply with the law. This article discusses all the different taxes a limited company has to pay. Finally, you’ll learn the exact method and time to remit different types of limited company taxes one by one.

What Taxes Does a Limited Company Pay?

An important consideration for any business owner is understanding what taxes does a limited company pay. The areas of corporation tax, PAYE, VAT, and dividends are among them. Therefore, understanding HMRC is imperative for legal safety.

Corporation Tax

• Understanding Corporation Tax

Corporation Tax is the main tax your limited company pays on its profits. Currently, this applies to all UK limited companies that generate taxable profits.

HMRC states that ‘Taxable profits are calculated by deducting allowable business expenses from business income.’ This means that record-keeping is a fundamental step in determining the amount of tax that you will be liable for.

• Corporation Tax Rates in the UK

The UK corporation tax system now has tiered rates. In particular, companies which make less than £50,000 must pay a 19% corporation tax.

However, profits over £250,000 will be liable to the full rate of 25%. Moreover, marginal relief is also applicable to profits within the mentioned bands.

Companies with profits between £50,000 and £250,000 pay a marginal rate of 19% to 25 %.

• When to Pay Corporation Tax?

Corporation tax must be paid within nine months and one day of the end of your accounting year. Also, HMRC must be sent a return of Corporation Tax (CT600) within 12 months.

Late payment attracts fines and interest. Thus, budgeting for the money throughout the year is a good strategy.

As per HMRC, every UK company is required to register for Corporation Tax within three months of starting business activity.

PAYE for Limited Companies

PAYE in limited companies comes into play when you are making salary payments to yourself or your employees. The taxation process involves the collection of income tax and National Insurance contributions before the payment of funds to the accounts.

You, as the employer, will also be responsible for managing the PAYE systems correctly to know what taxes does a limited company pay. Failure to do so can result in significant HMRC penalties.

• Setting Up PAYE

First, register with HMRC as an employer before your first payday. You will then be issued an employer PAYE reference number.

Then, you would require payroll software to determine the deduction amount. Afterwards, you would need to disclose such information to HMRC via Real Time Information.

• National Insurance Contributions

The national insurance contributions for directors also consist of two social classes: Class 1 employee contributions and Class 1 employer contributions. Employees contribute NI 8% on earnings between £12,570 and £50,270. On the other hand, employers contribute NI 15% for earnings above the Secondary Threshold

• Payment Deadlines

HMRC require PAYE payments by the 22nd of each month (or 19th by post payments). Additional requirements are that you also need to send in an Employer Payment Summary when claiming allowances.

How Dividend Tax Works?

Understanding what taxes does a limited company pay, is crucial for dividend calculation. Dividend taxation for directors applies where profits are drawn as dividends rather than as salary. Sometimes this arrangement works better for taxation purposes than a salary.

However, for dividends, there has to be available profit after Corporation Tax has been paid. Thus, there have to be enough retained earnings in your company accounts.

• Tax Rates on Dividends

At the moment, the annual tax-free dividend allowance is £500. Afterwards:

Basic rate: 8.75%

The higher rate taxpayer pays 33.75%

The additional rate the taxpayer pays is a further 39.35%.

• Salary and Dividend Streamline

The directors might take a nominal salary up to the National Insurance contribution is reached. They make the remaining profits in forms of dividends. This strategy reduces what taxes does a limited company pay.

HMRC’s rules specify that the granting of dividends must be declared in the company using dividend vouchers. Also, illegal dividends may result in the creation of personal liability for the directors.

VAT Registration Thresholds

Value Added Tax (VAT) is compulsory once the taxable turnover exceeds £90,000 in a period of 12 months. VAT is a key component in understanding what taxes does a limited company pay. However, voluntary registration is also an option below the threshold level.

Moreover, it is necessary to register and charge VAT to your customers. At the same time, you can claim VAT on your business expenses.

• VAT Schemes

The Flat Rate Scheme helps simplify calculations for small businesses.

The Cash Accounting Scheme, on the other hand, works well in terms of managing the cash flow of the business.

Each type of scheme is appropriate for a given business. So, find out which is most appropriate for your business.

• Value-Added Taxation Return

The standard VAT returns are done on a three-monthly basis. However, you will be required to file returns and tax payments due within a period of one month and seven days after every three months.

Making Tax Digital (MTD) requires businesses to use VAT-compliant software. As a result, investment in authorised accounting software is required.

Here are some useful links:

1. How to set up a limited company
2. Limited company vs Sole trader
3. Advantages & Disadvantages of limited company structure
4. Registered office address service London

National Insurance for Directors

• Class 1 National Insurance

As was mentioned above, national insurance for directors receiving salaries includes Class 1 contributions. These are split between employee and employer portions.

Paying yourself a salary above the Lower Earning Limits (LEL) for state pension entitlements. But keeping below the Primary Threshold (PT) of £12,570 yearly avoids employees’ NIC.

There is a zero rate NIC for falling between LEL and PT.

• Class 2 and Class 4 NI

Directors with insufficient salary may require Class 2 voluntary contributions for pension protection. It costs £3.50 a week, approximately.

Class 4 NI will apply if you’re a director and self-employed elsewhere. Rates currently are 6% on profits between £12,570 and £50,270, and 2% above that.

Capital Gain Tax (CGT)

The sale of company assets or shares may result in Capital Gains Tax liability. However, there is Business Asset Disposal Relief in the UK, also known as Entrepreneurs’ Relief.

• Rates and Taxes

If the business operates from commercial property, it will have to pay business rates to the concerned local authority. Business rate relief will considerably ease the burden.

Yet, this is not the same as the taxes payable to HMRC. Still, this is a major business expense.

• Stamp Duty

Purchasing property will attract Stamp Duty Land Tax. This is chargeable depending on the property price and usage. Moreover, when buying shares of companies, there may be a Stamp Duty payment due at the rate of 0.5%.

The Bottom Line

Knowing what taxes does a limited company pay allows you to confidently operate your business. From Corporation Tax to PAYE and dividend tax, there are several obligations requiring great attention.

With proper planning and professional support, the management of such taxes is not difficult at all. Finally, your compliance would save your company and personal finances from any penalties.

Don’t forget your registration for each tax when due. Then, make regular tax payments and keep accurate records throughout the year.

Eventually, tax compliance is not just about avoiding penalties. Rather, it’s always been about setting up a sustainable, profitable business within the legal frameworks.

Disclaimer: All the information provided in this article is general in nature it does not intend to disregard any of the professional advice.