So, you’ve developed your business plan, you’re confident that it’s viable and you’ve decided to open your limited company. Whilst your priority at this stage may well be trying to find as many new clients as possible, it is vital to gain an understanding of what taxes you are liable to pay and when. So, here is our straightforward guide to which taxes you may be liable to pay as a company director.
It almost goes without saying that exactly what taxes you need to pay will, to a certain extent, depend on your overall business strategy, so this is intended as a general overview. You can read more about profit extraction strategies in our article on the subject here. All the rates below are for the tax year April 2020 to April 2021.
Tax on Dividends
As a company director (and shareholder) the simplest way of taking money out of your company is via a dividend. Dividends can be defined as income from shares or other corporate rights, and they come out of the company profits after corporation tax has been paid. Anything that you transfer to your personal bank account before your year end is technically a director’s loan, not a dividend, so it is important to record it as such.
The amount of tax you have to pay on dividends is indicated below:
- Up to £2,000 – 0%
- Basic rate – up to £50,000 – 7.5%
- Higher rate – up to £150,000 – 32.5%
- Additional rate – above £150,000 – 38.1%
If you want to take a salary from your company, you will be liable to pay income tax if the salary is over a certain threshold, known as your personal allowance (£12,500 for the tax year 20/21). Income tax bands are shown below.
- Personal allowance – up to £12,500 – 0%
- Basic rate – up to £50,000 – 20%
- Higher rate – up to £150,000 – 40%
- Additional rate – above £150,000 – 45%
It is important to understand that these rates are marginal, which means that if, for instance, your gross salary is £55,000, you do not pay tax on the first £12,500, you pay 20% income tax on £37,500 (£7,500) and you only pay the higher 40% rate on the £5,000 that remains (£2,000, i.e. £9,500 in total). You do not have to pay 40% of £55,000 (£22,000).
National Insurance is paid by employees and employers in certain circumstances and contributes towards state benefits and pensions. It is also based on salary. As a company director, you are also a company employee, but you only have to make National Insurance contributions over a certain threshold. If you are looking to hire staff in the future, you will also have to pay National Insurance as an employer over a certain threshold. The various thresholds are shown below:
- Lower Earnings Limit – up to £120 per week (£240 per annum) – 0%*
- Primary threshold – up to £183 per week (£9,516 per annum) – 0%
- Upper Earnings Limit – up to £962 per week (£50,024 per annum) – 12%
- Above UEL – 2%
*You can pay this amount without having to run payroll
- Secondary threshold – up to £169 per week (£8,788 per annum) – 0%
- Class 1 Employer’s National Insurance – above £169 per week (£8,788 per annum) – 13.8%
Corporation tax is payable on the net profit your company has made at the end of its financial year. Your net profit is calculated by taking your total income and subtracting your cost of sales and overheads.
The corporation tax rate is currently 19%.
VAT is what is known as a ‘consumption tax’ on goods and services. It is payable whenever the product or service is sold on and as such is designed to tax the increase in value along the supply chain towards the final consumer, who pays the full amount.
If you are a director of a limited company, you have to register for VAT if your turnover for the last 12 months is more than £85,000 or if you anticipate that it will be more than £85,000 in the next month. Once you are VAT registered, you have to charge VAT on goods and services supplied in the UK and you can also claim back any VAT that you are charged by suppliers.
Generally, you need to complete four VAT returns per year, to comply with HMRC. There are, however, various special VAT schemes, which you can read about here.
The current VAT rate is 20%.
This list is not exhaustive, and you may be liable for other taxes depending on your financial situation. Various taxes might be applicable, for instance Capital Gains Tax, if for example you sell shares in the company for a profit.
If you are unsure about how much you should be paying, and to ensure you are not paying too much tax, get in touch with us for a no-obligation consultation.