Tax Implications of Forming A UK Limited Company

Corporation tax is the primary tax on the profits of a Limited company. As of the 2023/2024 tax year, the main corporation tax rate is 25% for companies with profits over £250,000. For companies with profits of £50,000 or less, a lower rate of 19% applies. There is also a marginal relief rate for companies with profits between £50,000 and £250,000.

Key Points;

• Corporation tax must be calculated and paid annually.
• Companies must file a corporation tax return (CT600) which HM Revenue & Customs (HMRC) within 12 months of the end of the accounting period.
• Payment of the tax is due nine months and one day after the end of the accounting period.

Read our article on Corporation Tax

Value Added Tax (VAT) – VAT is a tax on the sale of goods and services. If a Limited company’s taxable turnover exceeds the VAT threshold, currently £90,000, it must register for VAT and charge it on its sales.

Key Points;

• The standard VAT rate is currently 20%, with reduced rates of 5% and 0% for certain goods and services.
• Companies can reclaim VAT on purchases made for the businesses
• Regular VAT returns (usually quarterly) must be submitted to HMRC.

Read our article on VAT

Pay as You Earn (PAYE) and National Insurance Contributions (NICs). If a Limited company employs staff, including its directors, it must operate PAYE as part of its payroll. PAYE is the system for collecting Income Tax and National Insurance Contributions (NICs) from employees’ wages.

Key Points;

• Employers must deduct Income Tax and employee NICs from salaries and pay them to HMRC.
• Employers also have to pay employer NICs on their employees’ earnings above the secondary threshold.
• PAYE and NIC payments are typically made monthly.

Read our article on PAYE

Shareholders of a Limited company can receive profits in the form of dividends, which are subject to dividend tax rather than Income Tax.

Key Points;

• The first £1,000 of dividend income is tax-free (dividend allowance).
• Dividends above this allowance are taxed at different rates depending on the shareholder’s other income:
  • Basic rate taxpayer 8.75%
  • Higher rate taxpayer 33.75%
  • Additional rate taxpayer 39.34%

Read our article on Dividend Tax

If a Limited company operates from commercial premises, it will likely be subject to business rates, which are a tax on non-domestic properties.

Key Points;

• Business rates are set by local authorities and based on the property’s rateable value.
• Reliefs and exemptions may be available, such as Small Business Rate Relief

Read our article on Business Rates

Other considerations –

• Capital Gains Tax:  Limited companies do not pay capital gains tax; instead, any gains are included in the company’s profits and taxed under corporation tax.
• Research and Development (R&D) Tax Credits: Companies involved in innovative projects can claim R&D tax credits, which can significantly reduce their tax bill.

Tax Implications of Forming A UK Limited Company Conclusion

Forming a Limited company in the UK offers various advantages, including limited liability and potential tax efficiencies. However, it also brings responsibilities in terms of compliance with tax laws and regulations. Understanding the tax implications is crucial for effective financial planning and management. Entrepreneurs should consider seeking professional advice to navigate these complexities and optimize their tax position.

Your corporation tax return must include:

• Your company’s profits (calculated according to UK tax law).
  ,
• Any reliefs or deductions you’re claiming.
  .
• How much corporation tax you owe.

Most businesses file their returns online using HMRC’s Corporation Tax Online service or compatible software. Your accountant can assist with this, or you can do it yourself if you’re confident.