Understanding your tax obligations as a limited company director

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

With a number of different taxes that you may be required to pay, it can be difficult to understand the extent of your tax liabilities as a company director. However, ensuring you keep on top of your tax obligations is vital. Failing to register for VAT for example, or not submitting your tax payments as an employer, could result in HM Revenue and Customs taking action against you and your company.

In an ever-changing landscape, keeping up with current and impending legislation as a director is crucial to your company’s success. Here we look at five of the most common types of tax that you should be aware of as a company director.

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Corporation Tax

Corporation tax is paid on the taxable profits of your company, and currently stands at a rate of 19%. 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. Fail to do this by the deadline and you will begin accruing penalty fines.

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.

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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 personal allowance is currently £12,500 (2019-20), with any income above this amount being taxed under the Pay As You Earn (PAYE) scheme, and deducted at source by your company’s payroll system.

From 1st April 2018, individuals now have a tax-free dividend allowance of £2,000 in addition to the personal allowance mentioned above.

Any dividends above £2,000 will be taxed according to your taxpayer status as follows:

National Insurance

If you are paid a salary of £8,632 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. Contributions are calculated based on the salary you earn on an annual basis, although payment must be made to HMRC following your usual payroll whether than is monthly or weekly.

Employment Allowance means that you can claim back up to £3,000 of employers’ Class 1 National Insurance contributions in a tax year, if you are the director and you employ other staff.

VAT

From 1st April 2018, the threshold to register for VAT is £85,000; it has been promised that this will not change for the next two years. 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.

Once you are registered you can charge VAT on your goods and services as well as claiming it back on eligible products your company purchases. VAT is an indirect business tax as the amount has actually already been paid by the customer; you are just collecting it on behalf of 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:

Please note, the cash accounting and flat rate schemes cannot be used in conjunction with each other.

Business Rates

Although not technically a tax per se, business rates are similar to the council tax you pay for your residential property. If you operate from commercial premises it is likely that you will be required to pay business rates. The money received from business rates is used to pay for services nationally, including education and social care.

The amount you pay is based on the ‘rateable value’ of your premises which is its open market rental value. This figure is multiplied by the appropriate government-set multiplier. This multiplier is reassessed yearly with a separate (and lower) multiplier amount given for those businesses with a rateable value below £51,000. When you receive your business rates bill this calculation will have already been done for you and you will be told how much you owe. Payment of business rates is typically made across 10 equal monthly instalments over the course of the year. Fall behind in the payment schedule, however, and you may be asked to pay the remainder in one lump sum.

Rateable values are generally reassessed every few years, and there are various reliefs available to help eligible businesses. Some premises such as farm buildings which are used solely for agriculture and places of religious worship receive automatic exemption from business rate liability, and there are various other relief schemes 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, along with a multitude of other factors; you may be asked to pay business rates on the portion of your home you use for business, while paying council tax on the remainder of the property.

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 our team to arrange a meeting at any one of our offices.