The world of tax can be confusing, we’ve put together this blog to help you make sure you aren’t paying too much unnecessary tax. Financial planning is crucial to ensure your business is as profitable as possible, which includes legally minimising your corporation tax bill.
Understanding Limited Company Taxation
Understanding the basics of tax for a limited company can help make the world of tax less daunting. Companies House plays a crucial role in verifying company status and details, which is essential for compliance and registration of limited companies. Limited companies in the UK must comply with certain tax regulations, mainly corporation tax and income tax. Knowing how tax works can help you make decisions to minimise your tax liability and maximise your businesses profit.
What is corporation tax for a limited company?
Company profits are subject to corporation tax, which is a tax on the profits of a limited company. When you run a limited company, you will be required to pay corporation tax on your annual profits. For smaller businesses, corporation tax is set at 19%, whereas larger businesses exceeding profits of £250,000 will be taxed at a higher rate of 25%.
How does income tax affect owners of a limited company?
If you are an owner of a limited company then you are considered an employee of your company, which means you need to pay income tax on your salary. Income tax rates are between 20% to 45%, depending on your taxable income each year. You may also be required to pay National Insurance contributions on your salary.
How to reduce tax liabilities in a tax efficient manner as a limited company?
Managing Other Taxes
In addition to corporation tax, limited companies must also manage other taxes, including income tax, national insurance, and capital gains tax. As a limited company owner, you will need to ensure that you are meeting your tax obligations and taking advantage of available tax reliefs.
Income tax is paid by the company’s employees, including the directors, on their salaries and benefits. The company must deduct income tax and national insurance contributions from employees’ wages and pay them to HMRC.
National insurance contributions are also paid by the company on employees’ wages. The company must pay employers’ national insurance contributions, which are currently 13.8% of employees’ earnings above £9,568 per year.
Capital gains tax is paid on the sale of business assets, such as property or investments. The company must pay capital gains tax on any gains made on the sale of these assets.
To manage these taxes effectively, it is essential to keep accurate records and seek professional advice from an accountant or tax adviser.
Business expenses
Business expenses are physical items or services that are needed to run the business, from you or your employees. A business expense must be necessary for the business to run day-to-day. For example, some business expenses include equipment used to operate a business, professional fees from marketing companies, accountants etc, business travel expenses and insurance costs.
Business expenses are deducted from the company’s profits, which is what is used to determine how much corporation tax you pay. Therefore having a positive impact on your income tax bill, especially for business owners.
We recommend seeking professional advice to ensure you are correctly claiming your business expenses inline with HMRC regulations. Overclaiming or underclaiming can both have negative effects on your business, which is why getting expert advice is important.
Pension Contributions
As you are classed as an employee of your own company, paying yourself pension contributions will not only help you save money for the future but can also help you save on tax charges. Employer contributions to pensions are usually treated as a business expense, therefore you are unlikely to pay corporation tax on the contributions.
It is important to keep your pension contributions in line with the work you are completing for your business, otherwise HMRC may question the corporation tax relief. Most people have a personal pension allowance of £40,000 a year, however, you may be able to ‘carry forward’ allowance from the last three tax years if you didn’t make contributions up to the limit. Again, we recommend seeking professional advice to ensure you are maximising tax relief while staying inline with all of HMRC regulations around tax.
Make charitable donations
If you make a donation to charity from your profits then your company will receive tax relief on your corporation tax payment.
If you make a donation, whether it be money, shares, property or land, you can record them under ‘Qualifying Donations’ in your annual tax return and deduct them from your profits, therefore reducing your corporation tax bill.
Pay yourself a small salary and take profits as dividends
One of the most tax-efficient ways to withdraw money from your limited company is to pay yourself a small salary and take the remaining profits as dividend income.
Dividend income is a method of income distribution from company profits to shareholders and is known for its tax efficiency. By keeping your salary low, you can reduce your Income Tax and National Insurance contributions.
Dividends, on the other hand, are subject to Corporation Tax, which is generally lower than Income Tax and National Insurance rates. This strategy can help you minimise your overall tax burden and maximise your take-home pay. However, it’s important to ensure that you comply with all relevant tax laws and regulations. Consulting with a tax professional can help you make the most tax-efficient decisions for your business.
Hire an expert
Even though hiring an accountant comes at an extra cost (which you can claim as an allowable business expense!), you may find you end up saving money through being more tax efficient. An accountant to ensure you are paying the correct amount of tax and identifying any opportunities to reduce your tax bill. Not only this but you will also ensure you complete everything on time so you don’t receive any penalties or fines from late submissions.
Hiring an accountant to take care of your finances allows you to focus on the more important areas of your business.
Using an Accountant to Minimise Tax
Using an accountant can help limited company owners minimise your tax bill and ensure that you are meeting your tax obligations. An accountant can provide expert advice on tax planning and help the company take advantage of available tax reliefs.
An accountant can help the company to:
- Claim corporation tax relief on allowable expenses
- Obtain tax relief on pension contributions and charitable donations
- Minimise capital gains tax on the sale of business assets
- Ensure compliance with tax laws and regulations
- Prepare and submit tax returns to HMRC
When choosing an accountant, it is essential to select a qualified and experienced professional who is familiar with the tax laws and regulations affecting limited companies.
Avoiding Common Tax Mistakes
Limited company owners can avoid common tax mistakes by seeking professional advice and keeping accurate records. Here are some common tax mistakes to avoid:
- Failing to register for corporation tax or VAT
- Not keeping accurate records of income and expenses
- Not claiming allowable expenses or tax reliefs
- Not paying income tax or national insurance contributions on time
- Not complying with tax laws and regulations
To avoid these mistakes, it is essential to:
- Keep accurate records of income and expenses
- Seek professional advice from an accountant or tax adviser
- Ensure compliance with tax laws and regulations
- File tax returns on time and pay any tax due
- Take advantage of available tax reliefs and allowances
By avoiding these common tax mistakes, limited company owners can minimise tax bills and ensure that you are meeting tax obligations.
Why choose CloudAccountant.co.uk
Here at Cloud Accountants, we have helped business owners all over the UK, with a number of our different services, including helping them be more tax efficient. Whatever you’re looking for we can help. We will handle everything from your company formation through to corporation tax preparations and submission, giving you the time to do what you do best – running and growing a successful business.
CloudAccountant are platinum partners with the award-winning accounting software Xero and FreeAgent. We also work closely with transactional software systems such as LinkMyBooks, A2X and Dext to support multiple aspects of your business. Whether you are selling online or managing your expenses, we have software integrations that can help record information quickly and efficiently.
Get in touch
As a chartered accountancy practice registered with the ICAEW, our friendly team of accountants are trained in customer services, meaning they can convey the often-complex nuances of accounting in a simple and straightforward manner.
And just because we’re online accountants doesn’t mean our service will be any less personable. If you choose to be with us, you’ll get a dedicated account manager who you’ll have unlimited access to for one-to-one support via email, telephone and video call. You can even come in and see us if you like – we’re always happy to stick the kettle on.
Get in touch by emailing info@cloudaccountant.co.uk or by calling 01625 546 232 and one of our team will be happy to discuss your accountancy needs.