An Overview of the Taxes a UK Company Will Need to Pay and When

After starting your business and becoming a limited company owner in the UK, staying abreast of your tax obligations is essential for ensuring the financial stability and compliance of your business. Whether you are dealing with corporation tax or navigating Self Assessment, understanding the intricacies of business taxes can help you avoid costly penalties and ensure you are fulfilling your legal responsibilities.

This comprehensive guide delves into the key business taxes that limited companies in the UK need to be aware of, providing insights into what, when, and how you should pay these taxes. By equipping yourself with this knowledge, you can effectively manage your tax affairs, streamline your financial processes, and avoid potential pitfalls.

Understanding your tax obligations

As a business owner in the UK, it is crucial to understand your tax obligations to ensure the financial stability and compliance of your organization. The specific taxes you will need to pay depend on various factors, including your business structure, profit levels, and how you remunerate yourself as an owner or director.

There are a number of key business taxes to be aware of, but while you may not be liable for all of these taxes, it is essential to familiarise yourself with the main ones:

Corporation Tax: This tax is levied on the profits of limited companies. The current corporation tax rate in the UK is 25%.
Income Tax: If you are a sole trader or partner in a partnership, you will need to pay income tax on your business profits. Income tax rates vary depending on your income level.
National Insurance Contributions (NICs): Both employers and employees contribute NICs to fund state benefits. As an employer, you are responsible for deducting employee NICs from their salaries and paying both employer and employee NICs to HMRC.
VAT (Value Added Tax): If your business's annual turnover exceeds the VAT registration threshold, you are required to register for VAT and charge VAT on your goods and services.
Business Rates: Occupiers of non-domestic properties, such as business premises, are liable for business rates. These rates contribute to local council funding.
Dividends Tax: If you are a limited company shareholder and receive dividends, you will need to pay dividends tax on those dividends. Dividends tax rates vary depending on your income tax band.
Capital Gains Tax (CGT): If you dispose of assets such as property or shares, you may be liable for CGT on the profits from the sale. CGT rates vary depending on your asset disposal history and your income tax band.

Corporation Tax for Limited Companies

Navigating the world of corporation tax can seem daunting, but it's an essential aspect of running a limited company in the UK. Here's a simplified guide to help you understand your corporation tax obligations.

Who Needs to Pay Corporation Tax?

Corporation tax applies to limited companies, foreign companies with a UK branch or office, and clubs, co-operatives, or other unincorporated associations.

What is Corporation Tax?

Corporation tax is an annual tax levied on the profits your business makes during your financial year. This includes profits from trading, investments, and selling assets.

Corporation Tax Rates

Corporation tax rates vary depending on your company's profits:

Profits under £50,000: 19% small profits rate
Profits over £250,000: 25% main rate
Profits between £50,000 and £250,000: 25% main rate with Marginal Relief (a sliding scale reduction)

How to Pay Corporation Tax

Register for Corporation Tax: Register when starting your business or restarting a dormant one. Use your Government Gateway credentials and UTR (Unique Taxpayer Reference) to register.
Maintain Accounting Records: Keep accurate records for preparing your Company Tax Return, which calculates your corporation tax liability.
Pay Corporation Tax: Pay within nine months of your accounting period's end. Installments are required if profits exceed £1.5 million. Meet the deadline even if reporting no tax due.
File Company Tax Return: Submit your Company Tax Return within 12 months of your accounting period's end.

Navigating Income Tax for Sole Traders, Freelancers, and Employers

Income tax plays a crucial role in the financial landscape of both sole traders and employers. Whether you are managing your own profits or overseeing employee salaries, understanding income tax is essential for ensuring compliance and financial stability.

Income Tax for Sole Traders, Freelancers, and Self-Employed Individuals

As a sole trader, freelancer, or self-employed individual, you are responsible for paying income tax on your business profits that exceed your personal allowance. This tax is calculated and paid through your Self Assessment tax return, which must be submitted and paid by January 31st following the end of the tax year. For instance, the deadline for the 2022/23 tax year, which ended on April 5, 2023, is January 31, 2024. Missing this deadline would result in penalties.

As a self-employed individual, you have the advantage of a tax-free allowance known as the "trading allowance." This means that the first £1,000 you earn from your self-employment activities is exempt from income tax and National Insurance contributions. This can provide a significant boost to your earnings, especially during the initial stages of your business venture.

Income Tax for Employers

As an employer, you are responsible for deducting income tax from your employees' salaries. Income tax rates for employees are the same as for self-employed individuals. The difference lies in the source of income: income tax for employees is calculated on their salaries, while self-employed individuals pay tax on their trading profits.

Key Takeaways:

Income tax is a crucial aspect of financial management for both sole traders/freelancers and employers.
Sole traders/freelancers pay income tax on their profits exceeding their personal allowance through Self Assessment tax returns.
Employers deduct income tax from employee salaries.
Income tax rates are the same for both employees and self-employed individuals.

The income tax rates for the 2023/24 tax year in England, Wales and Northern Ireland are as follows:

Band	Taxable income	Tax rate	Personal allowance
Personal allowance	Up to £12,570	0.00%	£12,570.00
Basic rate	£12,571 to £50,270	20.00%
Higher rate	£50,271 to £125,140	40.00%
Additional rate	Over £125,140	45.00%

Income tax rates for Scotland differ slightly from the rest of the UK, and can be found at gov.uk.

Registering for PAYE: A Requirement for Employers

If your business expands to include directors or employees, you will need to register for PAYE (Pay As You Earn). PAYE is the system used by HM Revenue and Customs (HMRC) to collect income tax and National Insurance contributions from your payroll. This involves deducting these taxes from each employee's and director's wages on a monthly basis.

Essentially, PAYE acts as a middleman, ensuring that the appropriate taxes are collected and remitted to HMRC on behalf of your employees and directors. This streamline process eliminates the burden of individual tax payments for your employees and ensures compliance with HMRC regulations.

National Insurance Contributions

National Insurance (NI) plays a significant role in the financial landscape of both self-employed individuals and employers. Understanding your NI obligations is essential for ensuring compliance and financial stability.

NI for Self-Employed Individuals

As a self-employed individual, you're responsible for making two types of NI contributions: Class 2 and Class 4.

Class 2: This is a flat weekly contribution of £3.45.
Class 4: This contribution is calculated on your profits. For profits between £12,570 and £50,270, the Class 4 contribution rate is 9%. For profits over £50,270, the rate is 2%. These contributions are made through your Self Assessment tax return.

NI for Employers

As an employer, you are responsible for making NI contributions on behalf of your employees. The employer contribution rate is 13.8% for income above the secondary threshold, which is £758 to £4,189 per month. However, there are different rules for apprentices, employees under 21, veterans, and freeport workers.

PAYE Registration for Employers

If you have any directors or employees, you are required to register for PAYE (Pay As You Earn). PAYE is the system used by HM Revenue and Customs (HMRC) to collect both income tax and NI contributions from your payroll at the same time. This involves deducting NI from each employee's wages on a monthly basis.

Key Takeaways:

NI is a crucial aspect of financial management for both self-employed individuals and employers.
Self-employed individuals pay Class 2 and Class 4 NI contributions.
Employers pay NI contributions on behalf of their employees.
PAYE registration is required for employers with directors or employees.

Navigating the World of VAT

VAT, or value-added tax, is a prevalent tax that affects most businesses in the UK. Whether you are selling goods or providing services, understanding VAT is crucial for ensuring compliance and financial stability.

VAT Registration: A Prerequisite for VAT Collection

To collect VAT, you need to register your business with HM Revenue and Customs (HMRC). This can be done online through your Government Gateway account or with the assistance of an accountant or agent such as Your Company Formations.

Once registered, you become a VAT-registered business, responsible for charging VAT on your goods and services, typically at a rate of 20%.

VAT Payments: Balancing Customer Charges and Supplier Charges

As a VAT-registered business, you will have the responsibility of paying HMRC any VAT you owe. This involves calculating the difference between the VAT you charge your customers and the VAT you pay to your suppliers. If you have charged more VAT to customers than you have paid, you will need to remit the difference to HMRC.

Reduced-Rate and Zero-Rate Items: Exceptions to the 20% Rule

Not all goods and services are subject to the standard 20% VAT rate. Some items fall under reduced-rate VAT, such as food and children's clothes. Others are classified as zero-rate items, meaning no VAT is charged at all.

Examples of zero-rate items include books, most goods exported outside the UK, and certain medical supplies. A comprehensive list of reduced-rate and zero-rate items can be found on the HMRC website.

VAT Registration Threshold: When to Join the VAT Club

Businesses are required to register for VAT if their taxable turnover exceeds £85,000. This threshold is calculated on a rolling 12-month basis, meaning you need to review your turnover every month. If your turnover surpasses the threshold at any point, you have 30 days to inform HMRC and register for VAT.

Voluntary VAT Registration: A Strategic Choice

Even if your taxable turnover is below the £85,000 threshold, you can still choose to register for VAT voluntarily. There are potential benefits to doing so, such as reclaiming VAT on business expenses and appearing more credible to customers. However, it's essential to carefully consider the implications before making this decision.

Navigating Dividends Tax as a Business Owner

As a business owner, taking dividends is a common way to reward yourself for your hard work and financial contributions. However, it's crucial to understand the tax implications of dividend payments.

Dividends Tax: A Threshold-Based Approach

If you pay yourself dividends as a business owner, you will only be liable for dividends tax if the total amount exceeds the annual dividend allowance of £1,000 for the 2023/24 tax year.

Determining the Dividends Tax Rate

The dividends tax rate you pay depends on your income tax band. To calculate your new income tax band, simply add your total annual dividends to your base salary.

Basic Rate (£12,571 to £50,270): If you fall into the basic rate income tax bracket, any dividends exceeding your allowance will be taxed at a rate of 8.75%.
Higher Rate (£50,271 to £125,140): For those in the higher rate income tax bracket, dividends above the allowance are taxed at a rate of 33.75%.
Additional Rate (Over £125,140): If you fall into the additional rate income tax bracket, the tax rate for post-allowance dividends is 39.35%.

Tax Code Adjustments and Self Assessment Tax Returns

If your dividends total less than £10,000, you will need to notify HMRC to adjust your tax code. However, if your dividends exceed £10,000, you'll be required to complete a Self Assessment tax return.

Capital Gains Tax for Business Owners

As a business owner, you have likely encountered the concept of capital gains tax, a levy imposed on the profits you make when selling an asset that has increased in value.

Assets Subject to Capital Gains Tax

While your primary residence is exempt from capital gains tax, other business assets that have appreciated in value may trigger this tax. These include:

Land and Buildings: The sale of land or buildings owned by your business may result in capital gains tax.
Fixtures and Fittings: Profit from the sale of fixtures and fittings, such as furniture and equipment, may be subject to capital gains tax.
Plant and Machinery: The disposal of plant and machinery that has increased in value may incur capital gains tax.
Shares: Selling shares in your business or other companies can trigger capital gains tax on the profit generated.
Registered Trademarks: The sale of registered trademarks associated with your business may be subject to capital gains tax.
Business Reputation: The disposal of your business's reputation, including goodwill, may also incur capital gains tax.

Reducing Capital Gains Tax Liability

Fortunately, there are mechanisms to reduce your capital gains tax liability. One such option is Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs' Relief. BADR allows you to claim a reduced rate of capital gains tax when selling all or part of your qualifying business assets.

Navigating Business Rates

If your business operates from a dedicated location, such as a shop or office, you will encounter business rates, a property tax levied by your local council. Understanding business rates is essential for managing your financial obligations and ensuring compliance.

Business rates are calculated by multiplying your property's "rateable value" by the tax rate, also known as the "multiplier."

Rateable Value: This is an estimate of your property's annual rental value on a specific date.
Multiplier: The multiplier, typically expressed in pence, determines the tax rate you pay. In England and Scotland, the multiplier is based on your property's rateable value, while in Northern Ireland, it depends on the region and district of your business premises. Wales uses a fixed multiplier for all businesses.

The good news is that you may be eligible for business rate relief, which can significantly reduce your bill. Common types of relief include:

Small Business Rates Relief (SBRR): This relief offers a percentage reduction or complete exemption for businesses with properties below a certain rateable value.
Rural Rate Relief: This relief provides a discount for businesses located in rural areas.

Timing and Payment: Keeping Track of Your Bill

Your local council will send you a business rates bill before the start of the new tax year. In England, Scotland, and Wales, you can expect your bill in February or March, while in Northern Ireland, it may arrive in early April.

Seeking Professional Guidance

Given the complexities of the UK tax system, seeking professional guidance from an accountant or tax advisor is highly recommended. They can tailor their advice to your specific circumstances, help you navigate tax regulations, and ensure you are meeting your tax obligations effectively.