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As a company director, you are legally responsible for ensuring you and your company pay the correct taxes. One essential step to ensuring you do this is to engage an accountant who is experienced at working with small companies and contractors specifically. This will mean that you have the support of a professional who keeps up to date with changes in tax laws and can give you guidance that is specific to you and your company’s industry.
As the company’s director, you will need to pay a number of different taxes. This guide will explain some of the main taxes you will be required to pay. Although you may have the support of an accountant, you need to at least have a broad understanding of the liabilities.
Corporation tax
As a company, you will be required to pay corporation tax on all your profits every year. The corporation tax rate for 2017/18 was 19%.
A company’s profits are defined as:
Turnover
LESS salaries and employers’ NI contributions
LESS other tax deductible expenses
Visit our Guide to Expensesfor more information.
The company’s tax year runs from the month in which it is established until the end of that month in the following year, so if you set up your company on 21 September 2017, its first year end will be 30 September 2018 and all future years will run from 1 October to 30 September. Your company’s tax returns and corporate tax liabilities must be finalised within nine months of your year end.
National Insurance (NI) contributions
As an employer, you will be required to make NI contributions. There are two types: the Secondary (Employers’) National Insurance Contributions, and the Primary (Employee’s) National Insurance Contributions. These taxes are payable when you receive a salary from your company. No contributions are required on the first £8,164 of salary but above this amount, the rate is 12% for the Employee NI and 13.8% for the Employer NI. For the Employee NI, the amount reduces to 2% after earnings exceed £45,000.
Where you pay yourself a salary, your accountant will register the company as an employer on the Pay As You Earn (PAYE) scheme and will run a payroll report for each salary payment to calculate the amount due. This amount will then need to be paid to HMRC by the 22nd of the next month.
Income tax
All salaries paid from your company will be subject to income tax through the PAYE system. There is an income tax-free allowance set each year, for which no tax will be payable. For 2017/18, the tax free allowance was £11,500.
Since the minimum wage rules do not apply to shareholder-directors, you are free to set your salary at whatever amount you wish. To take advantage of the tax-free allowance, most directors will generally choose to take a salary below the threshold.
Similar to the NI contributions, the income tax payments must be paid to HMRC by the 22nd of the following month.
You will also need to be mindful of other incomes sources you may have, as HMRC may require you to fill out a Self Assessment Tax Return and will not be covered by your company’s tax return. This includes, for instance, income from rental properties or interest on savings not held in an ISA. Self Assessment Tax Returns must be filed and paid by the 31st of January following the end of the tax year (6 April-5 April) in which the income was received.
Dividend tax
As a shareholder of a limited company, you are entitled to a share of the company’s net profit (i.e. the amount remaining after Corporation Tax is due) proportional to your shareholding. If you are the only shareholder, this proportion will be 100%. Payments received from the company in this way are known as dividends, and are subject to dividend tax.
There was a dividend tax-free allowance of £5,000 for 2017/18, although this has been reduced to £2,000 in 2018/19. For now, where your dividends are above £5,000, there are three different tax bands for your total income including both salary and dividends.
Dividends that fall above the dividend-free threshold and below £45,000 will be taxed at 7.5% while dividends above this amount and up to £150,000 are taxed at 32.5%. Dividends above £150,000 are then taxed at 38.1%.
You have flexibility in choosing your dividend amount, just as long as there is enough profit in the company to pay it. Many contractors use dividends to allow them to manage their tax liabilities in any given year, leaving money in the company rather than incurring the higher dividend tax rates.
If you do choose to take dividends, you will need to declare all dividends received (including payments from any other shares you hold) on your Self Assessment Tax Return, and calculate the dividend tax due. An accountant can be quite handy for this exercise.
As with income tax payments, the dividend tax must be filed and paid by 31st January following the end of the tax year (6 April-5 April) in which the dividend is taken.
Capital Gains Tax
Capital Gains Tax (CGT) will become payable when the assets you sell are worth over £6,000 and are sold for more than what you paid for them. This tax is calculated on the difference between the sale price and the purchase price. The tax rate for CGT is 20% but it not payable on the first £11,300 of your gains in any given tax year.
Assets that may be subject to the CGT may include the following:
- Personal possessions worth more than £6,000
- Properties that are not in your main residence (e.g. holiday homes or buy-to-let properties)
- Shares that are not held in an ISA
- Business assets (e.g. shares in your company)
In the event you sell all or part of your company, subject to certain conditions being met, you may be able to claim Entrepreneurs Relief which will enable you to reduce your CGT tax rate to 10%.
Capital Gains should be reported and calculated on your Self Assessment Tax Return. The return must be filed and any tax paid by 31 January following the end of the tax year (6 April-5 April) in which the gain is made.
