Limited companies based in the UK are required to pay three main forms of tax to HMRC; corporation tax, value added tax (VAT), and national insurance contributions as an employer. Directors also need to pay personal tax and dividend tax.
Running a limited company comes with a wide range of duties, obligations, and, of course, tax considerations. Understanding the UK’s tax regime for limited companies means that you can plan ahead and ensure that you have sufficient funds ready for HMRC before any payments become due. It will also help you to maximise the taxation benefits of operating a limited company. In this article, we will explain the taxes payable by limited companies in the UK, including corporation tax, VAT, and employer National Insurance Contributions (NICs).
What is corporation tax?
The main form of taxation for UK limited companies is corporation tax paid on profits after expenses. Corporation tax is paid by limited companies, foreign companies with a UK branch or office, clubs, co-operatives, and unincorporated associations such as community groups and sports clubs. Limited companies do not pay income tax or national insurance like sole traders.
How is corporation tax calculated?
The amount of corporation tax payable is based on the profits of the limited company after any salaries and permitted business expenses (not all expenses can be deducted) before dividends have been taken out. Taxable profits include those made in the course of doing business (“trading profits”), any investments made by the company, and the sale of assets (“chargeable gain”).
The current rate of corporation tax as of the time of writing (December 2022) is 19%. The planned increase in corporation tax to 25% announced in the Spring 2021 budget will no longer go ahead. This means that the rate of corporation tax will remain at 19% from April 2023.
There is no tax-free allowance for corporation tax, hence you will pay 19% on all profits made. For example, if your company’s sales are £200,000 for the tax year, and you paid £60,000 in expenses, the company will pay 19% corporation tax on £140,000, which equates to £26,600.
How do I register for corporation tax?
Your company will most likely have been registered with HMRC for the purposes of corporation tax when it was incorporated and registered with Companies House. You are required to register for corporation tax within 3 months of actively trading (i.e. buying, selling, advertising, renting commercial premises, or employing staff). If you do not register within 3 months, you may receive a late registration penalty.
If you have not yet registered for corporation tax, you will need to complete the following steps:
- Sign in to your HMRC business tax account – you will need your company’s Government Gateway user ID and password. If you do not have a Government Gateway user ID and password, you can create one when you register. In addition, you will also need your company’s Unique Tax Reference (UTR) number. Your company’s UTR will have been posted to your company’s registered office address by HMRC within 14 days of its incorporation (registration) with Companies House
- Select the option to register for Corporation Tax, and
- Enter the required information, including your company’s registration number, the date you started to do business, and the date that your annual accounts are made up to.
Once you have registered for corporation tax, HMRC will confirm your registration and your deadline for paying corporation tax.
How do I pay corporation tax?
It is important to understand that you will need to prepare and submit an online Company Tax Return (form CT600) every year by the deadline given, even if no corporation tax is payable. The form will require details of your company’s income and expenses to work out the amount of corporation tax due. This is normally completed by an accountant with expertise in the preparation of company accounts.
The amount of corporation payable must be paid to HMRC no later than nine months and one day after your company’s accounting period end date. This can be paid in a number of ways, including by direct debit, from your company’s bank account or by debit or credit card (an additional fee is payable when using certain cards to pay corporation tax).
Value Added Tax (VAT)
What is Value Added Tax (VAT)?
VAT (Value Added Tax) is added to most products and services sold by UK companies where the company is required to charge/pay VAT. The current rate of VAT in the UK is 20%, however, certain items are zero-rated, including books, children’s clothes, and goods exported outside of the UK. A full list of VAT-exempt items can be found on the HMRC website.
In addition to the standard VAT process whereby VAT is calculated and paid quarterly, there are several VAT accounting schemes, including the:
- Flat rate scheme – enables small businesses (i.e. those with an annual taxable turnover of £150,000 or less excluding VAT) to pay VAT as a percentage of their turnover. This is a simpler scheme as there is no requirement to keep a record of your sales and invoices), however VAT cannot be claimed on most business purchases.
- Cash accounting scheme – whereby companies pay VAT when they are paid by their customers
- Annual accounting scheme – whereby a VAT return is only completed once each year
Do I need to register for VAT?
Unlike corporation tax, whether you need to register for VAT depends on the amount of money that your company turns over (i.e. your total sales). You must register your limited company for VAT if your taxable turnover in the last 12 months exceeded £85,000 (this is referred to as the VAT threshold). You will also need to register your limited company for VAT if you expect your sales to exceed £85,000 in the next 30 days.
The VAT registration rules also state that you will need to pay VAT even if your turnover is less than the threshold if you are based outside the UK, your company is based outside the UK, and you supply goods/services to the UK.
Turnover includes the value of all goods and services you sell, including zero-rated goods, goods hired or loaned to customers, business-related goods used for personal reasons, goods bartered part-exchanged or gifted, services received from businesses in other countries (“reverse charged”) and building work in excess of £100,000 that your business carries out for itself.
How do I register for VAT?
To register for VAT, you will need to complete the following steps:
- Sign in to your HMRC business tax account and select the option to register for VAT. As with corporation tax registration, you will need your company’s Government Gateway user ID and password. If you cannot register online for VAT, you can register by post.
- Enter the required information, including:
- your company’s UTR
- details of other businesses you have owned in the last 2 years
- your business’s banking details.
- company name, type, registration number, and business activities
- business contact details
- your turnover
- your VAT return periods (i.e. monthly, quarterly, or annually)
Once you have registered for VAT, HMRC will confirm your registration and send your 9-digit VAT number. Your VAT number must be added to all of your sales invoices. HMRC will also provide details of when you must submit your first VAT return/payment and confirmation of your VAT registration date (the effective date of registration). The effective date of registration is the date from which you can start charging VAT on your goods and services and reclaiming VAT on your expenses.
How and when do I pay VAT?
In most cases, as a limited company owner, you will pay VAT to HMRC each quarter. Your VAT returns and payment must be received by HMRC no later than 37 days before the end of the quarter. Like corporation tax, VAT can be paid by direct debit, card (debit or credit), or direct bank transfer.
National Insurance Contributions (NICs)
In addition to corporation tax and VAT, your company may also need to pay National Insurance Contributions (NICs), as follows:
- Primary NIC contributions – deducted from employee’s earnings and benefits at source through PAYE
- Secondary NIC contribution (class 1) – paid by the company on employee earnings
The current rate (2021/22) of secondary rate NIC is 13.8% on all earnings over the threshold of £170 per week, £737 per month or £8,840 per year. This is payable for most employees, with the exception of those under 21 and for apprentices under the age of 25.
In the majority of cases, company taxation will be calculated by an accountant, however, it is still important to understand your tax obligations as a company owner or director. By understanding the different types of company tax, when they are due, and how they are calculated, you can plan ahead and ensure you have the necessary funds to pay your tax when it is due.