How Much Tax Do Limited Companies Pay?
How Much Tax Do Limited Companies Pay? When you’re deciding the structure of your business you need to take many things into consideration. One of those is deciding if a limited company is the right approach for you. Understanding who pays corporation tax and how large your corporation tax bill might be could impact that […]
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How Much Tax Do Limited Companies Pay?
When you’re deciding the structure of your business you need to take many things into consideration. One of those is deciding if a limited company is the right approach for you. Understanding who pays corporation tax and how large your corporation tax bill might be could impact that decision. The amount of tax limited companies pay depends on the size and structure of the business. Smaller companies will notice a smaller corporation tax liability. Corporation tax rates vary based on profits. Those with taxable profits under £50,000 will pay 19% in the 2024-2025 tax year. Those with profits over £250,000 will pay 25% in the same tax year.
Besides a corporation tax, a company tax return will usually include National Insurance Contributions, VAT, and PAYE tax on employee earnings. Capital Gains Tax may also be payable when company assets are sold for more than their purchase price.
If you own or are setting up a limited company, our guide today will be important in helping you understand what taxes you’ll owe.
Overview Of Limited Company Taxes
Tax is a financial cost that is payable by all businesses to HMRC, and the specific amount that you will owe is calculated based on your business profits, losses, and the type of company that you own.
To help you to keep on top of the tax payments that limited company owners should be aware of, and to understand how much you should aim to set aside to settle your tax bill each year, we will break down what kind of tax limited companies need to pay below.
Our simple overview of the following taxes will leave you free to put your time, effort and energy into building your business and enjoying the fruits of your labour, rather than worrying about tax.
- Corporation Tax
- Value Added Tax (VAT)
- Employer National Insurance Contributions
- Personal tax payments for limited company directors (you will need to pay income tax as a director)
What Is Corporation Tax?
Corporation tax is the main tax that limited companies need to pay. Unlike sole traders, limited companies do not pay any income tax or national insurance but instead they do pay corporation tax on business profits, less any allowable expenses.
Corporation Tax is applied to limited company profits after salaries and other allowable business expenses have been paid, but before dividends are withdrawn. You must pay corporation tax as a limited company.
How Much Corporation Tax Will I Pay?
The current rate for corporation tax in the financial year 2024/25 is 19-25% depending on taxable profits. What that percent tax actually equates to in money owed to HMRC by your business will depend on the level of profits made by the company at the end of the tax year. You can find the current rate of corporation tax on the gov.uk website: Corporation Tax rates and allowances.
| Small profits rate (companies with profits under £50,000) | 19% | £50,001-£249,999 |
| Main rate (companies with profits over £250,000) | 25% | £250,000+ |
If at the end of the tax year your limited company has earned £300,000 and accumulated allowable expenses of £30,000, the business profits would sit at £270,000.
25% corporation tax rate would be paid on £20,000 of = £5,000
19% corporation tax rate would be paid on £250,000 = £47,500
Total tax bill = £52,500
How Do I Pay Corporation Tax And When Is It Due?
Limited company owners must submit an online CT600 form to HMRC annually. This form provides a breakdown of the company’s income minus any tax allowances and expenses in order for HMRC to calculate how much corporation tax is owed on their overall annual profits or trading profits.
The total corporation tax that you owe must be paid no later than nine months and one day after the end of your company’s accounting period ends. Limited companies have the choice of when to set their accounting year end date but once it is set, it must be the same every year.
The corporate tax owed can be paid online via your HMRC account using a company credit card, business bank account or direct debit.
What Is VAT?
VAT is the second largest tax that some limited companies have to pay. VAT stands for value added tax and it is a charge added to the price of most goods and services in the UK. When companies are VAT registered it means that they must charge VAT to their customers but can also reclaim the VAT that they have paid on business expenses and purchases.
When Should I Register For VAT?
Not all limited companies are registered for VAT but if you are likely to turnover £90,000 or more during any 12 month period then you are required to register your company for VAT with HMRC.
| VAT Registration By Year | ||
| 24/25 | 23/24 | 22/21 |
| £90,000 | £85,000 | £85,000 |
There are several types of VAT schemes available, including those that encourage you to register even if you are under the current VAT thresholds, and those that offer a flat rate payment. If you are at all uncertain about whether your business should be registered for VAT, an accountant will be able to advise you and confirm which VAT scheme is the best suited to your company and it’s finances.
How Do I Pay VAT And When Is It Due?
Limited company owners should pay their VAT bill quarterly from the date of their company’s registration. VAT returns must be submitted, and monies owed paid to HMRC no later than 37 days before the end of each quarter. Even if you have no VAT to pay or reclaim in a given quarter, limited companies that are VAT registered must still submit a quarterly VAT return.
Your VAT bill will be the total amount of VAT charged to your customers, usually at the standard rate of 20%, minus any VAT payments that the company has spent itself. The balance is the sum of the VAT payments owed to HMRC.
To work out how much VAT to charge on goods and services or to calculate how much VAT you have spent on business purchases, HMRC has a handy tax calculator. Knowing these calculations will be invaluable for keeping accurate income and expenditure records for the business accounts.
Employers National Insurance Contributions
There are several different types of National Insurance payments depending on whether you’re an employee, sole trader or company director. We cover employer contributions here and director contributions later in the article.
Employers are required to pay National Insurance Contributions on their employees’ earnings and benefits as well as being responsible for collecting employees’ Class 1 National Insurance contributions and income tax deductions through their PAYE system.
If you operate a limited company with staff on its payroll, you will need to pay ‘secondary’ class 1 National Insurance Contributions on your employees earnings. Primary contributions are deducted from the employee’s pay at source through PAYE.
The secondary contribution amounts due are currently 13.8% on all earnings over the secondary threshold for almost all employees except for staff under 21 and for apprentices under 25.
Secondary thresholds:
- 2024/25: £175 per week, £758 per month or £9,100 per year;
Check the latest NIC rates.
Employer NICs are also payable on some employee benefits but reimbursed expenses such as work related travel and subsistence, subscriptions and business entertainment expenses are exempt from tax and NICs.
Where limited companies pay expenses or offer benefits that are not exempt from National Insurance liability, or provided under a salary sacrifice scheme, they are reported via monthly payroll or declared on a P11D form at the end of the tax year.
Personal Tax Payments For Limited Company Directors
Corporation Tax, VAT and Employer National Insurance Contributions are the three biggest taxes that limited companies are required to pay but it doesn’t stop there. Company directors should also be aware of their personal tax liabilities that come from taking a salary and withdrawing dividends as a director of a limited company.
In order to build up a full picture of the amount of tax limited companies pay, company directors should consider both the business and personal streams of tax that they are required to pay in any given accounting year.
Personal tax payments include:
- Income Tax
- Dividend payments
- National Insurance Contributions
- Capital Gains
Income Tax For Company Directors
As a company director, you need to be aware that Income tax is paid on some of the income you personally receive from your limited company. This includes your salary, dividends and rental income.
If you are taking a salary via a payroll scheme then income tax and National Insurance Contributions are payable when the salary falls above the personal taxable allowance – £12,570 for the 24/25 tax year. These payments will be deducted at source and paid to HMRC through the company’s PAYE scheme on a monthly or quarterly basis along with the payments due for your employees.
Dividend Payments
A dividend is a share of the company’s profits that is paid to its shareholders. A shareholder is any one that owns all or part of a company. Company directors must complete a self assessment tax return every year to declare the dividend payments that they received so that any tax due to HMRC can be calculated and paid.
Tax Free Allowances And How Much You Pay
Company owners do not pay tax on any dividend income that falls within their personal allowance and just like income tax, everyone has a tax free dividend allowance too. This means that you only pay tax on dividends received if the total payments exceed the dividend allowance set by HMRC. For 2024/25 the dividend allowance is set at £500, so only dividends above this amount are due to be taxed.
The actual amount of tax you will need to pay on dividends depends on your tax band and dividend allowance. Your tax band can be calculated by adding your total dividend income to your total salary for the year. The total will indicate the level of tax payments owed.
Find out more about income tax and dividend thresholds.
How And When Do I Pay Personal Tax Owed?
The deadline for filing and making payments of personal tax owed to HMRC is 31st January every year. This is done via a self assessment tax return. Company owners should also be aware that if the amount of tax they owe is over a certain amount, then they will be required to make a payment on account.
Payment on account is an advanced payment towards your next tax bill. The amount due is based on a percentage of the total tax owed for the current tax year that you are filing for. Any one submitting a self assessment tax return should be aware that this advanced payment will increase the amount of money that you will need to set aside to settle your personal tax bill.
Related Questions:
What Are The Benefits Of A limited Company?
A limited company can provide entrepreneurs with several advantages, such as:
- Liability protection: A limited company structure protects the interests of the owners of a business, as they are not personally liable for any debts or other liabilities incurred by the company. Business owners may have to put up personal assets to secure loans and other debts, but this does not mean that those assets can be seized by creditors.
- Tax planning: The ability to set up a tax-efficient structure is one of the major benefits of forming a limited company. A company can legally minimise its tax liabilities and maximise profits, while still complying with the regulations set forth by HMRC.
- Brand recognition: A limited company has a certain level of prestige associated with it compared to other business structures. This may make it easier for the company to attract customers, partners and investors.
- Funding potential: It is often easier for a limited company to secure funding from banks, venture capitalists and other sources, as the structure is seen as more reliable and secure.
- Perpetual existence: A limited company exists until it is dissolved, regardless of whether its directors or shareholders change over time. This can provide a level of continuity to a business that other structures may not offer.
- Separate legal personality: A limited company is seen as a separate legal entity by the law, and therefore can have its own assets, employees and liabilities. This makes it easier to protect personal assets from any debts incurred by the company.
Do I Need An Accountant To Set Up A Limited Company?
Most limited companies will have an accountant to manage their payroll, accounting records, employee and personal tax payments, but this isn’t a requirement.
Ultimately, the decision on whether to hire an accountant or not is yours. This will likely depend on how comfortable you are meeting the reporting needs of HMRC on top of your day job. Like any business decision it’s important to weigh up the cost of hiring an accountant vs the benefit they offer.
Due to the accurate and extensive records that you are legally required to keep as a limited company owner and the time this can take, you may decide that hiring an accountant would be beneficial.
Accountants can speak to HMRC on your behalf so if you’re looking to save time, enjoy the benefits of tax efficiency and ensure employee pay is handled correctly then you may find it easier to outsource your accounting needs to a qualified accountant.
What Is A Public Limited Company?
A public limited company (PLC) is a type of business entity that has the right to offer shares to the general public. It is formed by registering with Companies House and must comply with certain legal requirements set out in the Companies Act 2006. It can be either an existing private limited company which has decided to “go public” or a new company specifically formed for the purpose of going public. Public limited companies typically have a higher level of regulation than private limited companies and must disclose certain financial information for shareholders to review.
How To Register A Company In The UK
If you’re looking to start a business in the United Kingdom, the first step is to register your company. This can be done through Companies House which is the UK’s official government body for registering companies. Companies House will provide you with valuable advice on setting up your business and making sure it follows all the necessary regulations.
Summary
Corporation Tax, VAT and Employer National Insurance Contributions are the three biggest taxes owed by limited companies. Directors of limited companies will also need to settle their personal tax obligations on top of this via a self assessment tax return submitted to HMRC each year.
The specific amount of tax your limited company and the directors within them will pay will depend entirely on the size of business turnover, profits, expenses and number of staff on payroll. The amount of tax owed can be reduced if you are smart about the amount of salary and dividend payments that directors take from the business but it’s important to ensure that you stay on top of your tax obligations whilst remaining tax efficient, which is where a qualified accountant comes into their own.
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