How Does Limited Company Tax Work?

Starting a limited company can be an exciting step in your business journey, but it also comes with important financial responsibilities. Understanding how limited company tax works is essential for staying compliant and making the most of available tax benefits. Here’s a comprehensive guide to help you navigate the tax landscape for limited companies.

What Taxes Does a Limited Company Pay?

A limited company in the UK is subject to several types of taxes. The main ones include:

1. Corporation Tax: This is the primary tax paid by limited companies. It applies to the company’s profits, including income from trading, investments, and capital gains. As of the 2023/24 tax year, the Corporation Tax rate is 25% for companies with profits exceeding £250,000. A lower rate of 19% applies to companies with profits of £50,000 or less, with a tapered rate for those in between.
2. Value Added Tax (VAT): If your company’s taxable turnover exceeds the VAT registration threshold (£90,000 in the 2023/24 tax year), you must register for VAT. Once registered, you’ll need to charge VAT on your goods or services and submit regular VAT returns to HMRC.
3. Pay As You Earn (PAYE) and National Insurance Contributions (NICs): If your company employs staff, including directors taking a salary, you’ll need to operate a PAYE scheme to handle income tax and NICs. These deductions are made from employees’ wages and paid to HMRC.
4. Business Rates: If your company operates from commercial premises, you may be required to pay business rates to your local council.

Corporation Tax in Detail

Corporation Tax is one of the most significant taxes for a limited company. Here’s how it works:

• Profits Subject to Tax: Corporation Tax is calculated on your company’s taxable profits, which include revenue from sales minus allowable expenses, such as staff salaries, office costs and certain business-related purchases.

• Filing a Corporation Tax Return: Your company must file a Corporation Tax Return (CT600) annually, detailing its income, expenses and tax owed. This return must be submitted to HM Revenue & Customs (HMRC) within 12 months of your company’s accounting period.

• Payment Deadline: Corporation Tax payments are due within nine months and one day after the end of your company’s financial year.

Tax-Efficient Strategies for Limited Companies

Operating a limited company offers several opportunities for tax efficiency. Here are some common strategies:

1. Claim Allowable Expenses: Ensure you claim all allowable business expenses, such as office supplies, travel costs, and marketing expenses. These reduce your taxable profits and, consequently, your Corporation Tax bill.

2. Take Advantage of Tax Reliefs: Explore tax relief schemes such as the Annual Investment Allowance (AIA), Research and Development (R&D) Tax Credits, and First Year Allowances on certain equipment purchases.

3. Pay Yourself Tax-Efficiently: Many directors choose to take a combination of salary and dividends. Dividends are taxed at a lower rate than salaries and do not incur National Insurance Contributions.

4. Contribute to a Pension Scheme: Employer contributions to a director’s pension scheme are tax-deductible for the company and do not count as taxable income for the director.

Responsibilities and Deadlines

As a limited company owner, staying on top of your tax responsibilities and deadlines is critical. These include:

• Registering for Corporation Tax: Within three months of starting business activities.

• Filing Annual Accounts: Submitted to Companies House nine months after the end of your financial year.

• Submitting Tax Returns: Corporation Tax Return to HMRC within 12 months of the accounting period end.

• Paying Taxes: Corporation Tax payments due within nine months and one day of the financial year’s end.

How a Company Formation Agent Can Help

Managing your limited company’s tax responsibilities can feel overwhelming, especially if you’re new to running a business. As a company formation agent, we can help UK businesses stay compliant and tax-efficient. Here’s how we can assist:

• Registering your company with HMRC for Corporation Tax and VAT.

• Preparing and filing your Corporation Tax Return and annual accounts.

• Advising on tax reliefs and allowable expenses.

• Providing ongoing support to ensure you meet deadlines and stay compliant.

Final Thoughts

Understanding how limited company tax works is a crucial part of running a successful business. While there are several taxes to consider, careful planning and expert advice can help you manage your obligations efficiently and minimise your tax burden. If you’re ready to start your business journey, our team is here to guide you through every step of the process.