Limited Company Tax Explained: A Comprehensive Guide

Understanding the tax obligations of a limited company can be complex.

This guide breaks down the essentials of limited company tax, helping you navigate the system with confidence. Whether you are starting a new business or managing an existing one, knowing how tax works for limited companies is crucial for compliance and financial planning.

Limited Company Tax Explained: What You Need to Know

When you run a limited company, the business itself is a separate legal entity. This means the company pays tax on its profits, not the individual owners. The main tax a limited company pays is Corporation Tax. This tax is charged on the company’s taxable profits, which include income from trading, investments, and capital gains.

Corporation Tax rates can change, so it’s important to stay updated. As of now, the rate is set at 25% for companies with profits over £250,000. For smaller companies with profits under £50,000, the rate is 19%. Companies with profits between these thresholds pay a tapered rate.

How to Calculate Taxable Profits

To calculate taxable profits, you start with your company’s total income and subtract allowable business expenses. These expenses must be wholly and exclusively for business purposes. Examples include:

• Office rent and utilities

• Employee salaries and benefits

• Business travel costs

• Equipment and supplies

  
  

Non-allowable expenses, such as personal costs or fines, cannot be deducted.

Calculating company profits for tax purposes

Filing Corporation Tax Returns

Limited companies must file a Corporation Tax return (CT600) annually with HM Revenue & Customs (HMRC). This return details your income, expenses, and the tax due. The deadline for filing is 12 months after the end of your accounting period, but payment of the tax is due within 9 months and 1 day after the accounting period ends.

Failing to file or pay on time can result in penalties and interest charges, so it’s essential to keep accurate records and meet deadlines.

Do Limited Companies Pay 40% Tax?

A common question is whether limited companies pay 40% tax. The answer is no. Limited companies do not pay income tax rates like individuals. Instead, they pay Corporation Tax on their profits, which is currently much lower than 40%.

However, if you are a director or shareholder and take money out of the company as salary or dividends, you may be subject to personal income tax. For example:

• Salary is subject to Income Tax and National Insurance contributions.

• Dividends have their own tax rates, which are currently 8.75%, 33.75%, or 39.35% depending on your income bracket.

  
  

The 40% tax rate applies to individuals earning between £50,271 and £150,000 per year, but this is separate from the company’s tax obligations.

Filling out personal tax forms related to dividends and salary

Tax Planning Strategies for Limited Companies

Effective tax planning can help reduce your company’s tax bill legally. Here are some practical tips:

1. Claim all allowable expenses - Keep detailed records and claim everything you are entitled to.

2. Use the Annual Investment Allowance (AIA) - This allows you to deduct the full cost of qualifying assets like machinery or equipment in the year of purchase.

3. Pay yourself a tax-efficient salary and dividends - Balancing salary and dividends can reduce National Insurance and Income Tax liabilities.

4. Consider pension contributions - Company contributions to a director’s pension are tax-deductible and can reduce profits subject to Corporation Tax.

5. Defer income or accelerate expenses - Timing income and expenses can help manage taxable profits within different accounting periods.

   
   

Consulting with a professional accountant can help tailor these strategies to your specific situation.

Understanding VAT and Other Taxes for Limited Companies

In addition to Corporation Tax, limited companies may need to consider other taxes:

• Value Added Tax (VAT): If your company’s taxable turnover exceeds £85,000 in a 12-month period, you must register for VAT. VAT is charged on most goods and services and must be reported quarterly.

• PAYE and National Insurance: If you have employees, you must operate PAYE (Pay As You Earn) to deduct Income Tax and National Insurance from their wages.

• Business Rates: If you operate from commercial premises, you may be liable for business rates, a local tax on property.

  
  

Each tax has its own rules and deadlines, so staying organised is key.

We can help with Limited Company Tax

Managing limited company tax can be challenging, especially if you are new to running a business. Professional accountants and tax advisors can provide valuable support. We can help with:

• Preparing and filing Corporation Tax returns

• Advising on tax planning and compliance

• Handling VAT registration and returns

• Managing payroll and PAYE obligations

Understanding the tax responsibilities of a limited company is essential for smooth business operations. By knowing how Corporation Tax works, planning your finances wisely, and seeking expert advice when needed, you can keep your company compliant and financially healthy. Stay informed, keep good records, and make tax work for your business success.