Limited Company Taxes
The main taxes you should know about when you run a limited company – VAT, Corporation Tax, National Insurance, Self Assessment.
As a limited company contractor, you will have to deal with a number of business taxes. Although your accountant will take care of most of your company administration, the company’s directors must ensure that all taxes are paid, and returns submitted to HMRC on time.
Here is a brief overview of the main limited company taxes:
Corporation Tax is applied to all company profits. The current rate (2017/18), for companies of all sizes, is 19%. Each year, your accountant will complete your company tax return – with a copy sent to HMRC and Companies House. You have 9 months and 1 day to pay your Corporation Tax liabilities for the previous year.
Value Added Tax
All companies have to register for VAT if their turnover is £85,000 or more in any 12 month period (2017/18 tax year). However, most contractors register right away, as not only does being VAT registered look more professional when you invoice clients, you can also reclaim the VAT back on company expenses.
Additionally, the Flat Rate VAT scheme may actually save you money as a contractor, and you can benefit from a 1% reduction in the standard 14.5% IT contractor flat rate during the first year.
Contact your accountant to establish whether or not you would be better off under the Flat Rate scheme.
Class 1 NICs are payable by both the limited company, and any employees. Many contractors decide to pay themselves a small salary, which does not breach the threshold for paying NICs.
The 2017/18 Class 1 Employers’ NIC rate is 13.8% on all salaries paid over £8,164 per year.
The Class 1 Employees’ NIC rate is 12% on earnings between £8,164 and £45,000 per year, and 2% on salary paid above £45,000 per year.
PAYE (Income Tax)
You will pay income tax on any salary paid above the personal allowance for the tax year in question. For the 2017/18 tax year, the personal allowance is £11,500. So, the following rates apply to all income AFTER the personal allowance has been accounted for.
- The basic rate of 20% applies to income up to £33,500 during 2017/18.
- The higher rate of 40% applies to income of between £33,501 and £150,000.
- The ‘additional’ 45% rate applies to income above £150,000.
Tax on Dividends
Most contractors extract most of their funds from their companies in the form of dividends. Unlike salaries, dividends are not subject to National Insurance Contributions.
The old (2015/16) dividend tax rates were:
- 10% for basic rate taxpayers.
- 32.5% for higher rate taxpayers.
- 37.5% for additional rate taxpayers.
Before 6th April 2016, a 10% dividend tax voucher is issued with each dividend, cancelling out the 10% tax owed for basic rate taxpayers completely, and the effective dividend tax rates were 25% and 30.56% for higher, and additional taxpayers respectively.
From 6th April 2016, a new dividend tax regime was implemented, with fixed dividend tax rates, and an end to the dividend tax voucher.
The current dividend tax rates are as follows:
Basic Rate (£0-£32,000) – 7.5%
Higher Rate (£32,001-£150,000) – 32.5%
Additional Rate (£150,001 or more) – 38.1%
Additionally, a £5,000 dividend allowance’ has been provided, which means the first £5,000 of dividends is not taxable. Importantly, hwever, this allowance does not reduce the total income figure upon which you are taxed.
Always check with your contractor accountant if you have any questions about tax issues.
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