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The different taxes that all company directors need to be aware of

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The different taxes that all company directors need to be aware of

Reviewed: 11th July 2016

A complex tax system in this country can make it difficult to understand your liability as a company director. Failing to register for VAT for example, or submit your tax payments as an employer, could result in HM Revenue and Customs taking action against you, including issuing a range of financial penalties.

Keeping up with current and new legislation as a director is crucial to your company’s success, so here we look at five of the most common types of tax that you should be aware of as a company director.

Corporation tax

Corporation tax is paid on the taxable profits of your company, and currently stands at a rate of 20%. As soon as the company was formed you should have registered to pay this tax, which is applied to all profits, as there is no equivalent to the personal allowance for limited companies.

Corporation tax becomes due nine months and one day after the end of your accounting year, and you have an obligation to complete a CT600 which is the annual corporation tax return.

So what might taxable profits include? Profits made during normal trading activities, most investments, and profits from the sale of assets are generally included in the figure. You may be entitled to claim reliefs and capital allowances to reduce your corporation tax bill.

Income tax

If you are director of a limited company, you may be liable to pay income tax on the dividends and salary you take out of the business. The lower threshold is currently £11,000, so any income above this amount will be taxed under the Pay As You Earn scheme, and deducted at source by your company’s payroll system.

A new dividend taxation regime came into force on 1st April 2016, whereby individuals have a tax-free dividend allowance of £5,000 in addition to the personal allowance mentioned above.

New dividend tax rates have also been introduced:

  • Basic rate: 7.5%
  • Higher rate: 32.5%
  • Additional rate: 38.1% 

 

The new regime was introduced to prevent company directors withdrawing most of their income from the business as dividends, and avoiding National Insurance contributions.

National Insurance

If you are paid a salary of £8,060 or more from your company, then you’ll be liable for Class 1 National Insurance contributions as an employee. The company itself will also need to pay Class 1 employer’s contributions to HMRC.

The New Employment Allowance was introduced in 2014, however, which means that you can claim back up to £3,000 of employer’s Class 1 National Insurance contributions in a tax year, if you are the director and you employ other staff.

VAT

From 1st April 2016, the threshold to register for VAT is £83,000. If your turnover exceeds this figure at any point during a rolling 12-month period, you must inform HMRC. Failing to register for VAT, non-payment of the tax, or sending late payments, will all incur financial penalties.

VAT is paid on many goods in the UK, and your company collects it on behalf of HMRC. The difference between how much you receive in VAT, and how much you pay, is the amount sent to HMRC.

The standard rate of VAT is currently 20%, but schemes are available to make the collection and reporting process easier for eligible companies. For example:

  • Cash accounting: helps eligible companies with their cash flow, as VAT is only paid out once the money has been received by the business.
  • Flat rate scheme: this simplifies the calculation process, and makes administration easier.

 

Business rates

Business rates are similar to the council tax you pay on your home, so if you operate from business premises you will probably be liable to pay this type of tax. The money received from non-domestic properties is used to pay for local services, including education and social care.

The amount you pay is based on the rateable value of your premises multiplied by the government-set business rate multiplier, which is reassessed every few years. Two different figures are used – the ‘standard’ multiplier and a small business multiplier which takes account of lower turnover levels.

Rateable values are generally reassessed every few years, and there are various reliefs available to eligible businesses. Some premises such as farm buildings receive automatic exemption from business rate liability, and there are various other reliefs available depending on the size and nature of your business.

Home-based companies are not always subject to business rates, but this depends on whether you employ staff to work from your home, and also the nature of the business.

Real Business Rescue can ensure you comply with all your tax liabilities as a company director, and avoid the hefty penalties imposed by HMRC for late or non-payment. Call one of our offices around the country to speak to one of the team.


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