The tax rules and obligations of limited companies in England and Wales differ from those of sole trader and partnership businesses. If you own a limited company, it is important to understand how tax is calculated to ensure ongoing compliance with the company tax regime. Limited companies pay Corporation Tax of between 19% and 25% depending on the amount of profit made each year. In addition, Value Added Tax (VAT) and employer’s National Insurance contributions (NIC) may be payable to HMRC. In this article, we will explain how much tax limited companies pay, the penalties for late payments, and how to reduce company tax liabilities.
Understanding the basics of UK limited company taxation
Corporation Tax is the principal tax for limited companies in the UK and is payable on taxable profit. Limited companies are legally required to register with HMRC for Corporation Tax within three months of starting their business activities. The corporation tax registration process involves sending details of the company’s structure, activities, and accounting reference date to HMRC. The Accounting Reference Date (ARD) for new companies is the last day of the month on which the first anniversary of incorporation falls. For example, if a company was incorporated on 7th January 2023, the first ARD is 31st January 2024. The company must then make its accounts up to 7 days on either side of its ARD
How Corporation Tax Applies to UK Limited Companies
Corporation tax is payable on any profit made from the income of a limited company within a specific accounting period. This applies to profit made on income from trading, investment, and capital gains.
It is crucial for businesses to accurately forecast and calculate their taxable profits to ensure compliance with HMRC’s taxation regime. This requires an understanding of the rates of Corporation Tax in addition to any eligible deductions, allowances, and reliefs that can reduce the overall amount of tax to be paid. Working closely with a trusted professional accountant or tax advisor is essential in correctly calculating and reducing a company’s tax liabilities.
The Current Corporation Tax Rate for UK Limited Companies
The current standard rates of Corporation Tax that apply to UK limited companies are as follows:
|25% (this is the “main rate.”
|19% (this is the “small profits rate”)
|Between £50,000 and £250,000
|Marginal relief provides a gradual increase in Corporation Tax rate between 19% and 25%. HMRC provides an online calculator to work out how much marginal relief for Corporation Tax is available.
How to calculate your limited company’s taxable profits
Taxable profit is the amount of money made by a limited company minus any allowable business expenses, such as stock, rent and utilities, and wages. It is also important to note that limited companies in the UK pay Corporation Tax on all profits from the UK and business overseas.
For the purposes of calculating taxable profits, allowable expenses are costs that a limited company pays either wholly or exclusively for the purpose of its trade. These may include, for example, rent, utilities, salaries, uniforms, IT costs and any other essential business expenditures. In addition, certain capital allowances may apply to further reduce the amount of Corporation Tax to be paid to HMRC. Capital allowances, including the Annual Investment Allowance, allow businesses to deduct the cost of certain assets, such as equipment and machinery, from taxable profits.
There are several steps in calculating limited company taxable profits:
- Calculate the total amount of revenue for the tax year
- Deduct the cost of any business expenses (e.g. travel, electricity, water and rent), and then
- Deduct any pension contributions and gross salaries
To ensure that your limited company’s taxable profits are correctly calculated, it is essential that you partner with a trusted accounting professional who can manage your annual Corporation Tax return.
The role of dividend tax in limited company taxation
The payment of dividends allows business owners and shareholders to take profits from a limited company; however, tax must be paid on these amounts. Dividend tax is only paid to HMRC if the individual’s income exceeds their personal tax allowance (currently £12,570). In addition to the standard personal tax allowance, those receiving dividends have a dividend allowance of £1,000 per year (this applies in the tax period from 6th April 2023 to 5th April 2024).
The amount of dividend tax to be paid depends on the total amount of dividends received in the tax year, as follows:
|Dividend tax rate
|£12,571 to £50,270
|£50,271 to £125,140
Understanding VAT and How It Affects Limited Companies
Value Added Tax (VAT) must be paid by businesses with a VAT-taxable turnover for the last 12 months of £85,000 (the VAT threshold) or more. Limited companies are also required to register for VAT if they expect turnover to exceed £85,000 in the next 30 days, even if this has not yet happened. In turn, VAT-registered limited companies charge VAT on their sales.
It is possible to reduce the amount of VAT owing by reclaiming VAT on allowable business expenses. In addition, there are different VAT schemes, including the Flat Rate Scheme and the Cash Accounting Scheme, which offer businesses flexibility in how they manage their VAT obligations.
The Impact of Business Rates on Your Limited Company
Limited companies that operate from commercial premises, such as an office, shop, licensed premises, warehouse, factory, or holiday rental home, should be aware of their obligations to pay business rates. Business rates are charged by and payable to local authorities rather than HMRC based on a “rateable value” (the open market rental value as of 1st April 2021). The rateable value is calculated by the Valuation Office Agency (VOA) and depends on the property’s location and value. If you believe that your rateable value is too high, it is important to inform the VOA as soon as possible.
Various business rate relief schemes also apply in England and Wales to reduce the amount payable. Such schemes include the Small Business Rate Relief (SBRR) for businesses with a low rateable value or other sector-specific reliefs.
How to pay your limited company’s tax bill
The deadline for the payment of Corporation Tax is nine months and one day after the end of the accounting period for the last financial year. For example, if the accounting period ends on 30th April, the corporation tax deadline for payment will be 1st February of the following year.
Corporation tax can be paid to HMRC using a variety of methods, including direct bank transfer, online payments, direct debit, or at a bank or building society.
The consequences of late or non-payment of company taxes
Late or non-payment of taxes can have negative consequences for a limited company. Depending on the circumstances, HMRC may levy penalties and interest charges, which can increase the total amount owed. HMRC provides options for businesses facing financial challenges, such as setting up payment plans or negotiating time-to-pay arrangements.
The penalties for late payment are as follows:
|Time after deadline
|HMRC will estimate the Corporation Tax owed and add a penalty of 10%
|Another 10% of any unpaid tax
It may be possible to appeal a penalty for late payment if there is a reasonable excuse (e.g. death of a close family member or serious ill health).
Tax planning strategies for UK limited companies
Utilising all of the available tax reliefs and allowances and staying informed about changes in tax legislation can help businesses reduce their tax liabilities. Tax planning strategies may include:
- Tax-efficient ways to extract profits
- Using research and development (R&D) tax credits
- Optimising capital allowances (e.g. using the Annual Investment Allowance (AIA), First-Year Allowances (FYA), and super deductions).
Given the range of tax allowances and credits available for limited companies, it is important to seek the expertise of an accountant who understands the tax rules and will properly reflect these within your annual accounts and returns.
The company tax regime in the UK is constantly evolving. A corporate tax strategy that works today may not be effective in the future; hence, it is important to regularly review how your tax is calculated and how this may impact important business decisions. Effectively managing UK limited company taxation involves having a solid grasp of Corporation Tax, VAT, and business rates. It is also important to understand the wide range of allowances and deductions that can legally reduce the amount of corporation tax to be paid. Limited company owners also need to comply with their legal obligations to keep accurate financial records and ensure that filing and payments are completed by the deadlines provided by HMRC. By partnering with a knowledgeable and trustworthy expert company accountant, you can relax in the knowledge that your corporation tax is fully in hand and as efficient as possible.