Setting up a limited company can seem pretty daunting when you realise you suddenly have total control – and responsibility – for your finances, including your tax affairs.
However, the benefits of owning a limited company can be substantial and can make a significant difference to how much you take home each month, so don’t be put off – read on to find out what you need to know about limited company tax.
Having your own limited company means you are in charge of your finances – and it’s a responsibility you need to take very seriously if you don’t want to get into trouble with HMRC!
As the owner, you need to understand the rules around limited company tax – basically, how much you need to pay and when.
Whether you hire an accountant to manage the day-to-day running of the business or employ their services towards the end of the financial year, you are the one legally responsible for making sure everything is happening as it should.
Don’t forget, as well as filing your tax return to HMRC, you need to file your accounts with Companies House, although you may be able to do this together if your company doesn’t need an auditor.
Corporation tax – the simple bit
One of the very first things you should do when setting up your limited company is register to pay corporation tax – every limited company pays this tax, now at a rate of 19 per cent following a change in April this year.
Don’t forget to deduct your own salary from your company’s profits before you work out how much to pay: for example, if you are invoiced £100,000 plus VAT over 12 months and take a salary and expenses of £20,000, you’ll only need to pay corporation tax on the £80,000.
Work out if you need to pay VAT
If your limited company is likely to have a VAT taxable turnover (the total of everything sold that isn’t VAT exempt) of £85,000 or more then you must register for VAT.
If you don’t register and end up going over that threshold, you will have to pay back what you owe and could also be hit with a penalty from HMRC, so don’t ignore it if you think it’s possible – it might just be easier to register even if your turnover is below the limit.
Don’t forget that once you are VAT registered you can also reclaim the VAT you have paid on services bought for use in your business, so make sure you keep all of your records!
For many limited companies, it might be worth looking into the VAT Flat Rate Scheme. This sees you pay a fixed rate of VAT to HMRC – the rate may depend on the nature of your business – and you then keep the difference between that and the amount of VAT you charge your customers.
Dividends aren’t as good as they were – but still worth it
Despite some significant changes in last year’s budget, dividends are still one of the main reasons why so many people set up their own limited company.
By paying corporation tax and a fairly small salary, you can then take dividends from the company to boost your income as they are not subject to National Insurance.
How much tax you pay on your dividends depends on the tax band you fall into for your other income, so in an ideal world you would pay yourself a lower salary and make up the majority of your income through dividends.
At the moment, the first £5,000 of dividends are always tax free – but that will be cut to £2,000 from April 2018. Check with your accountant for how the changes might affect your business.
Limited company tax: a summary
There’s no denying that sorting out taxes can initially be tricky to understand, but getting to grips with the basics and seeking the advice of a good accountant specially trained in contracting will help ensure you get the best financial deal for you.
If you’re still feeling unsure about limited company tax, why not get in touch with our team? If you have any questions about the processes we’ve covered, we can talk you through it.