As a director of a limited company, it’s your responsibility to make sure that your taxes are filed on time. The type and amount of tax you have to pay will entirely depend on your company. We suggest you seek out professional tax guidance when dealing with tax.
That being said, below is an overview of the 4 main types of limited company tax you should be aware of as a director:
To put it simply, corporation tax is paid by limited companies in the UK annually on their profits and must be paid 9 months and 1 day after the end of your accounting period if your taxable profits are up to £1.5 million.
Corporation tax is currently at 19% in 2021. However, in 2023 this will only apply to businesses with less than £50,000 profit. Businesses who earn over £50,000 profit will have to pay more corporation tax depending on their total profit, which means they could be paying up to 25% corporation tax!
When paying your corporation tax, you can delegate to an accountant, but ultimately, as a director, you’re responsible for making sure it’s paid. If you fail to pay your corporation tax on time you will be fined by HMRC:
- 1 day late = £100
- 3 months late = Another £100
- 6 months late = HMRC will estimate your corporation tax and add a 10% penalty on top
- 12 months late = another 10% of all unpaid tax will be added
VAT, also known as Value Added Tax, currently stands at 20% in 2021. If your company turns over more than £85,000 in 12 months or you expect to exceed £85,000 turnover in the next 30-day period. This turnover excludes anything exempt from VAT, such as postal stamps and services etc. You can find out more about taxable turnover on the government’s website here.
If your turnover is less than £85,000, you don’t need to register for VAT by law, but you still can if you want to. If you register for VAT you will be able to reclaim VAT on purchases if you pay more VAT than what you make your customers pay, to make up the difference.
Once registered for VAT, you will need to charge VAT correctly, Submit VAT returns, Pay VAT that’s due and keep VAT records. It’s worth hiring a professional accountant to take care of VAT to avoid any penalties.
If you don’t register for VAT when you should, you could face a penalty depending on how long you leave it:
- Up to 9 months late = what you owe in VAT + 5%
- Between 9 and 18 months late = what you owe in VAT + 10%
- Over 18 months late = what you owe in VAT + 15%
There are also penalties for defaulting when making VAT payments and between a 15% and 100% fine if you submit an inaccurate VAT return. Like Corporation tax, we suggest you seek professional help from an accountant when it comes to VAT and all other types of limited company tax.
National Insurance Tax
There are 2 types of National Insurance that as a director you need to be aware of. The first is National Insurance (Class 1 primary). This is where the director will pay 12% National Insurance on income (excluding dividends) where the year total is between £9,500 and £50,000 (for 2020/2021).
The second type is the employer’s National Insurance liability (Class 1 secondary). This is where the company will pay 13.8% National Insurance on the directors’ wages that exceed £9,500 (for 2021)
If you plan to have other employees, you will have to pay National Insurance contributions and collect employees National Insurance contributions too.
As a director, you’re likely to get paid in dividends, which e discuss in more detail in part 7 of this blog series. You do not pay dividend tax on the first £2000 you receive through dividends, or if your dividend income falls within your personal tax allowance.
The amount of tax you pay after the above allowances depends on your income tax band:
- Basic rate = 7.5% tax on dividends
- Higher rate = 32.5% tax on dividends
- Additional rate = 38.1% tax on dividends
This is just the tip of the iceberg when it comes to limited company tax. As a limited company director, it is your responsibility to make sure everything is paid on time and correctly, so it’s worth hiring a professional to make sure this is all done correctly and in a timely fashion.
Keeping your books and records up to date will help you when it comes to paying taxes. An easy way of doing this is to download ANNA Admin. ANNA Admin will keep your books up to date and will automatically sort your income and expenses and prepare your tax return ready to send to HMRC and you can provide your accountant with access to the necessary information they need. You can even get ANNA Admin for free by clicking here.
The next part of the Being a director blog series discusses expenses, click here to head over there now.