Tax basics for directors of one-man-band Limited Companies
When you start to trade or work via your own company, you will be liable for a number of business taxes, in addition to the individual taxes you will already be familiar with when you had a permanent job.
All companies pay a tax on their annual profits. Assuming you make under £300,000 in profits, your company will be liable to the ‘small profits’ tax rate which is currently 20% (2016/17 tax year). Larger companies, who generate over £1.5m in annual profits pay the main corporation tax rate, which is now aligned with the small profits’ rate of 20%. In between the two thresholds, a system of ‘marginal relief’ applies.
Small Business Accountant will inform HMRC that your limited company has been formed (unless it is already active and you have paid corporation tax before).
Each year, our accountant will fill in your Corporation Tax return (Form CT600) and submit it online. You must pay the previous year’s tax within 9 months of your company year-end date.
When you set up your limited company, you automatically get different reporting dates for the first:
- annual accounts you send to Companies House
- Company Tax Return you send to HM Revenue and Customs (HMRC)
You may also have to send (‘file’) 2 tax returns to cover your first year in business.
Your first accounts usually cover more than 12 months. This is because of they:
- start on the day your company was set up (‘incorporated’)
- end on the ‘accounting reference date’ that Companies House sets for the end of your company’s financial year – this is the last day of the month your company was set up
Value Added Tax
We advise you if you are contractors or one-man-band directors to register for VAT, even if they do not expect to breach the £82,000 turnover threshold in any given 12-month period. Depending on your circumstances, you can register for the standard VAT scheme or the Flat Rate scheme.
If you don’t expect to reclaim large amounts of expenses, you may well be better off by joining the Flat Rate Scheme. Instead of accounting for VAT on each transaction on the standard scheme, you apply a flat percentage to your turnover (14.5% for most contractors, other may vary). In the first year of joining the scheme, you benefit further from a 1% discount to the flat rate – to 13.5%.
Each quarter, you (or we as your accountant) will complete a VAT return, and submit it together with payment within one month of the end of the quarterly period.
Employers’ National Insurance
Limited companies pay Class 1 NICs on the salaries paid to their employees. As your ’employer’, your company will, therefore, be liable to pay 13.8% on the salary you draw at or above £156 per week (2016/17).
Employees’ National Insurance
Employees (including limited company directors) also pay Class 1 NICs on their earnings. The rates are 12% between £155 and £827 per week, and 2% on earnings above £827 per week.
Read more in out guide to National Insurance.
Any salary you draw as a limited company director is subject to standard PAYE (Pay as your Earn) taxation.
You will pay income tax on any income received above the personal allowance threshold (£11,000 in 2016/17), according to the tax bands you cover (at 20% – basic rate, 40% – higher rate and 45% – additional rate).
The higher rate tax band threshold is £32,000, so you will enter the higher rate band when you earn more than the £11,000 personal allowance plus £32,000 = £43,000.
Income Tax rates and bands
The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £11,000.
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £11,000||0%|
|Basic rate||£11,001 to £43,000||20%|
|Higher rate||£43,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
Dividends are taxed at three rates during the 2015/16 tax year – 10%, 32.5% and 37.5% depending on the amounts involved. However, to account for the tax that Corporation Tax has already been paid on the company’s profits, a 10% tax credit is applied to all dividends, which means that the effective tax rates are actually 0% (basic rate), 25% (higher rate), and 30.55% (additional rate).
- From 6 April 2016, the notional 10% tax credit on dividends is abolished.
- A £5,000 tax-free dividend allowance is introduced.
- Dividends above this level are taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
- Dividends received by pensions and ISAs are unaffected
- Dividend income is treated as the top band of income.
- Individuals who are basic rate payers who receive dividends of more than £5,001 will complete self-assessment returns from 6 April 2016.
How you pay tax on dividends
How you pay depends on the amount of dividend income you got in the tax year.
Less than £5,000
You don’t need to do anything or pay any tax.
Between £5,000 and £10,000
Tell HMRC by:
- contacting the helpline
- askingHMRC to change your tax code – the tax will be taken from your wages or pension
- putting it on your Self Assessment tax return, if you already fill one in
You’ll need to fill in a Self Assessment tax return.
If you don’t usually send a tax return, you need to register by 5 October following the tax year you had the income.
You’ll get a letter telling you what to do next after you’ve registered.
Other taxes you may come across while work through Limited Company include Capital Gains Tax (if you realise a profit on any investments, including if you sell your company at some time in the future).