tax and national insurance and corporation tax for limited companies

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january 2005

tax and national insurance

As a limited company owner you pay yourself a salary which is subject to PAYE (Pay As You Earn) and you will have to complete a Self Assessment tax form each year to assess whether any other tax is due from company benefits etc. You must also deduct PAYE from all employees. You must register your payroll with HM Revenue and Customs, even if you are the only person on it. Contact the helpline and registration for new employers on 0845 60 70 143.

You pay income tax and employee’s Class 1 National Insurance contributions on your employment income. Income tax is deducted from all earnings above your personal income tax allowance (which depends on personal circumstances) ,At present there is a basic personal allowance of £4,895 and tax rates on income above personal allowance are 10% up to £2,090 and then 22% after that amount up to £32,400. Any earnings above this are taxed at the higher rate of 40%. You must also pay employee’s Class 1 National Insurance contributions on your employment income from the company. Class 1 contributions in this tax year are 11% of weekly earnings between £94 and £630 and 1% on earnings above £630. (Lower rates apply if you belong to a contracted-out occupational pension scheme). Your business also has to pay employer’s Class 1 National Insurance contributions for you and any other employees. This is 12.8% of employee’s weekly earnings above £94 a week.

corporation tax

The company will also pay corporation tax on its business profits - the bottom line figure on your profit & loss account. Profits less than £10,000 are currently free from corporation tax but there are different rates for profits above this level. A yearly profit between £50,001 and £300,000 is subject to 19% corporation tax, and over that amount the rate rises gradually from 19% to 30% (marginal relief). Taxable profits over £1.5 million are charged at 30%. There is a minimum 19% rate of corporation tax on a company’s profits when it pays dividends to individuals. Rates change and there are varying factors so check out the latest position with your accountant or financial advisor. Corporation tax bands may be reduced for certain companies, especially if there are other companies under the same control (e.g. if you own and run two companies the thresholds will be halved for each company).

As a limited company or a limited liability partnership registered with Companies House, you must, within 12 months of the end of your first accounting period, let HM Revenue & Customs know that it is operating. Accounting periods are the basis periods for corporation tax. Your first accounting period begins when your company or limited liability partnership starts operating. Accounting periods do not have to mirror the tax year but they must be longer than 12 months. Obviously you must keep detailed records relating to all income and expenses, and if you are a limited company run the correct PAYE procedures for yourself and any other employees. (See separate articles on these.)

Once you are registered as a registered company, it will be responsible for working out and paying any corporation tax due within nine calendar months and one day after the end of its accounting period. You can be fined for inadequate records or paying late. Company records must be kept for at least six years.

Shortly after the end of the company’s accounting period, you will get a corporation tax return form (CT600) along with a Notice to Pay. Even if you don’t receive one it is your responsibility to pay the tax and complete and send a corporation form.

capital gains tax

Whether you are a sole trader or a limited company, you may have to pay Capital Gains Tax (CGT)if you sell any assets. If you are looking to create and sell a business, or use the proceeds from the sale of your business to fund your retirement you need the advice of a good accountant who can look at your specific business needs. In general if an item is worth more than you paid for it when you come to sell, or ‘dispose’ of it, you may have to pay CGT on the difference. At present there is an annual exemption of £8,500 and taper relief which is more effective and valuable the longer the asset has been held. If there are still taxable gains after these and other allowable expenses have been taken into account, they are taxed at 10% until the gain added to other taxable income reaches the top of the person’s starting rate income tax band. After that the gain is taxed at 20% until the total of taxable income and taxable gains reaches the top of the basic income tax band and 40% (top tax rate) on any balance above that.

Limited companies pay corporation tax on any capital gains, so they are treated as part of the company’s taxable profit. Tax advice as capital gains can be complex and it is vital to obtain the exemptions and reliefs you are entitled to.

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about the author

Heather Harrison is a highly regarded member of the Duport team. Her thorough knowledge of small businesses, combined with her talents developed during a career as a well respected journalist, make her articles very popular with our readers. Heather has worked on a variety of weekly and monthly magazines, both in the consumer and business press.

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