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The Limited Company Tax
Individuals working in the contracting industry under an umbrella company are used to paying Income Tax and National Insurance Contributions (NICs) through PAYE on their gross earnings.
However, if you are considering becoming a limited company contractor how do things change and what other taxes do you need to consider?
When working through a limited company, as its director and shareholder you can take advantage of some personal tax efficiencies by taking a small salary and most of your reward by way of dividends. Dividends are taxed at a lower rate than salary and are not subject to NICs.
If your limited company is invoicing at the rate of £85k pa or more then it is going to have to register for VAT. It may be that the company can take advantage of HMRC’s Flat Rate VAT Scheme but the real impact for a new limited company is Corporation Tax.
Profits are likely to consist of ‘trading’ profits from doing business (income less expenses), income from any investments it has and any gains it may make from selling assets such as land and property, equipment and machinery.
Unfortunately it isn’t possible to ‘avoid’ paying Corporation Tax if your company is making taxable profits. You can, however, ensure that the tax bill is kept as low as possible by taking a few simple steps:
The current rate of Corporation Tax is 19%.
The tax is applied to the profits made on the company’s accounting period. This is usually in line with the company’s financial statements and annual accounts. Most businesses have a 12 month accounting period (it can’t be longer than 12 months).
New companies need to be registered for Corporation Tax within 3 months of starting to trade.
This will include buying and/or selling goods or services, advertising, renting business premises, employing someone etc. Please note that if you don’t register by the deadline your company can face a penalty.
Corporation Tax is a self-assessed tax and a Return needs to be filed with HMRC together with the company’s accounts. Even if your company is loss-making and no Corporation Tax is due, you still need to file your Return and accounts.
The deadline to file the return is 12 months after the end of the accounting period it covers. However, you’ll need to prepare your Return earlier in order to work out what Corporation Tax to pay in time for the payment deadline!
The Corporation Tax bill has to be paid 9 months and 1 day after the end of the accounting period for your previous financial year. For example, if your accounting period ends on 31 March 2020 (31 March is a common period end), your Corporation tax payment deadline is 1 January 2021. Your Return filing deadline would be 31 March 2021. HMRC has a flexible range of accessible online payment methods.
No. Because it is a levy on the profits made by a company rather than an expense incurred in making those profits.
Examples of allowable Corporation Tax expenses you may be able to claim include mileage, accommodation, salaries, training, advertising and business insurance. The rule is that such expenses need to ‘wholly and exclusively for the purposes of the trade’. So, no private or personal expenditure will be allowable.
Purchases of business assets needed to run your limited company, like vehicles, machinery and equipment will be classified as capital expenditure and not directly deducted in calculating profits but may be eligible for capital allowances of up to 100%.
Simple ways in which to legitimately reduce Corporation Tax liabilities include:
If your company is working on contracts which are outside IR35 then you’ll pay Corporation Tax on the profits the company makes. However, if you have work which is inside IR35 you can choose to perform that work as, for example an umbrella employee. None of the income from those contracts would pass through the limited company.
Should you choose to work inside IR35 through your company, although PAYE and NICs will be deducted from the payments made to it for that work, the income, and the tax/NICs deducted from it will be deemed to be a legitimate business leaving no profit and thus no Corporation Tax payable.
If you would like to speak to one of our experience new business consultants, please call us on 0161 923 0201 and press option 1 and then option 1 again