There are many reasons why you may decide to set up as a limited company. If you are planning on growing your company and can envision a high turnover, setting up a limited company will have many benefits including saving tax.
However, there are many tax bills you need to be aware of and along with it an increase in related admin. Your tax bills will likely to be:
2. Payroll taxes
3. Corporation tax
As a director of the company, you will also need to pay personal income tax which is not through your company.
Value Added Tax
This is a tax on your goods and services that you sell and that you collect on behalf of HMRC. When you send out your sales invoice, you add VAT and then when you fill out your VAT return, you pay HMRC the VAT you have collected on your sales.
This is usually offset against any business purchases you make. If you buy goods from a VAT registered supplier, you pay the supplier the full amount, but you can claim back the VAT you have paid to the supplier in your VAT return. This will reduce the amount of VAT you pay.
If you are on a Flat Rate Scheme, the amount of VAT you pay over to HMRC is calculated based on a percentage lower than the standard rate of 20%. The percentage is determined by the type of work you do and how much HMRC believe the purchase VAT comes to. This percentage is calculated on your gross sales and is used to reduce the administrative burden of calculating VAT on all your purchases.
VAT is due quarterly one month and seven days after the end of your VAT quarter unless you are on an annual accounting scheme. In this case, payments are still due in regular installments but the VAT return is only due once a year.
As a director, you are an employee of the company. Employees get a salary and pay over PAYE and NI. It is a good idea to pay yourself enough salary to cover your NI contribution to qualify for state benefits such as pension and maternity allowances. The minimum that you need to pay yourself to get this is £5,876. The optimal salary, to take into account your personal allowance, would be £8,164 which is before you start getting charged for the Employers NIC at 13.8% and employees NIC at 12%. These figures are correct for the current tax year 2017/18.
This is a tax on profit. Once you have worked out all your sales for the year less allowable business expenses for the year you are left with a profit. Corporation Tax (CT) is calculated on this profit and then if you have any money left after your CT, then the shareholder can take this as a dividend.
Dividends cannot be taken retrospectively, so it is important to have up to date management accounts to ensure the correct dividends are taken. These management accounts will also give you an idea of how much to save for corporation tax.
Changes in dividend taxation mean that the first £5,000 of dividends are not taxed, after that, it is taxed at 7.5% for basic rate taxpayers and then at 32.5% for higher rate taxpayers. There is also an additional rate at 38.1% for dividends above £150,000
Personal income tax
Your personal income tax is separate from your company taxes and is due by the end of January, and if you have Payment On Account (POA), this is due on the 31st January and 31st July every year. POA t is based on the income tax you have paid in the year and is split into two payments. This will reduce the amount you have to pay for the following year if all your figures remain the same. If you know for certain you will not earn as much the following year; you can apply for a reduction in the payment on account.
You need the following information to calculate your income tax:
• P60 from your company
• Dividend vouchers from your company
• P11d for any benefits in kind you may have taken
Corporation tax is due nine months and one day after the year-end
VAT is due one month and seven days after the end of the VAT quarter
Personal income tax is due on the 31st January, and payment of account is due on 31st July
If you would like any further information, please contact Southside Accountants in Wimbledon.
Written by Nisha Patel – Chartered Certified Accountant and a Tax Expert