Taxes and Compliance for Ltd Companies
Incorporating a Limited Company and operating the new legal entity can bring with it many advantages, however, there are compliance obligations that you must be aware of to ensure you that your business is organised and stays on the right side of HMRC and Companies House.
New companies who are not compliant run a risk of being fined by HMRC and being struck off or dissolved by Companies House. Being unaware or disorganised could also mean that your business operations are at risk of falling into disarray while you are playing catch up thus hindering your progress and likelihood of success.
Did you know, businesses most likely to succeed are those who are organised in terms of administration? Here’s everything you need to know to make your company year run smoothly…
Limited Company Taxes
The tax advantages of Limited Companies are often regarded as the most attractive benefit.
Limited Companies pay Corporation Tax presently at a flat rate of 19%. This is in comparison to taxes for a sole trader which are presently 20% for PAYE at the basic level with incremental rises to 40% then 50% of all income. Sole traders must also account for class 4 National Insurance of 9%.
Taxes for Directors and Shareholders of Limited Companies
Following the tax treatment of a Limited Company, directors and shareholders will need to extract from the company. As individuals they are treated similarly to sole traders, however, the flexibility of profit extraction from a Ltd Company is better.
Sole traders are taxed based on the profit made in their financial year. If they turnover £100k and have £20k of costs they will pay tax rates of 20%, 40% and national insurance on the £80k profit. If a Ltd Company has the same year it would pay 19% tax on the entire profit.
However, a Ltd Company can further reduce the level of profit subject to tax by paying directors and shareholders a salary up to the tax-free allowance. As this is counted as a cost the profit can be reduced by up to £11,500 for each director or shareholder registered as an employee of the company therefore eligible to receive a salary.
As an example, if a Ltd Company has a turnover of £100k and one director/shareholder and it incurs costs of £20k (including other employee’s salaries) and furthers the salary of the director/shareholder of up to £11,500 it would be subject to tax at 19% on £68,500.
Furthermore, the after-tax remainder can be left in the company until directors and shareholders wish to extract it as dividends, however, they need not take the entire amount therefore only paying tax on the amount they wish to receive unlike a Sole Trader who needs to pay tax on the entire amount left whether they wish to use it or not. Dividends carry a tax-free allowance of £2k and have a much lower rate of income tax for amount after £2k.
Limited Company Compliance
All businesses have administrative responsibilities in terms of accounting for and declaring the amount of money they brought in, spent and owe tax upon. Failure to file this information with the relevant bodies will result in fines and could see directors struck off and the company dissolved.
Limited Companies must be aware of the following:
- Statutory Accounts: Accurate accounts must be submitted to Companies House each year. You have 9 months after the company’s financial year to file these accounts before you are subject to penalties. For smaller companies (under the Audit Threshold) you may submit abbreviated accounts; these will be unpublished.
- Tax Returns: A Corporation Tax return and iXBRL accounts must be submitted to HMRC annually. You must return these within 12 months of the company’s financial year ending.
- Confirmation Statement: Also known as an annual return you must submit an annual confirmation statement to Companies House on each anniversary of incorporation.
- All directors and shareholders must file self-assessment tax returns to declare income extracted as dividends. As an individual you need only file one self-assessment no matter how many companies you are extracting cash from; all income is announced on one document.
- You will also be responsible for PAYE taxes and payroll administration for any employees and should consider P11D’s for taxable benefits.
- If you have multiple shareholders you should have a shareholder agreement
Limited Company Tax and Compliance Assistance
To ensure your company is accounted for and that you are extracting cash in the most tax efficient way you may want to ask for assistance.
Cottons are chartered small business accountants we offer affordable packages for Limited Companies from start-up to audit level so wherever you are we can assist you.
If you would like our assistance keeping your Limited Company compliant then talk to us today.