A Guide to Limited Company Tax and Expenses

A limited company is one of the best ways to conduct business, especially when expanding your operations.

Running a limited company involves several costs, most importantly, tariffs. For the company to run effectively, corporate tax compliance from the taxation authorities is essential.

We will look at the various levies to be paid, such as Corporation Tax and VAT and allowable expenses. To gain a better understanding of these private entities, we will review some of their critical elements such as formation and levying.

 How To Register A Limited Company

The first step involves incorporating your company and register it with Companies House. They charge a fixed fee of £12 or £40 if you register by post. It is advisable to use the services of an accountant to lead the process, ideally using an accountant that will be managing the accounts for your business. The next step involves the registration of your company, and there are several essential steps to follow:

  1. Name Search – Your company name needs to be unique to prevent future legal issues. It is crucial to take time when choosing a company name and to pay attention to trademarks. You will also need a company address for official mail.
  1. Appoint a Governing Body- the next step involves the appointment of a director and other personnel who will help run the business entity such as the company secretary. The director is in charge of the core duties of the company, such as maintaining accounts and filing returns.
  1. Shares or Limited by Guarantee – The next step looks at the limited aspect of the company, whether it is limited by shares or by guarantee. A company limited by guarantee is most of the time not for profit, and it has guarantors and a guaranteed amount. A company limited by shares can keep its profits after levying from the HMRC, and it has shares and shareholders.
  1. Preparation of Relevant Documents – The final stage involves the development of essential documents for the smooth running of the business entity. These include the articles of association and memorandum of association. These documents contain clauses that address areas such as the purpose of the business and who runs it.

Pay attention to the records to keep, and then you can register the company. When finalising the process at the Companies House, you will have to provide an official address and a SIC code, which entails the nature of your business.

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Limited Company Expenses

When managing your taxable profit, it is essential to factor in the expenses you incur when running your business. You arrive at the payable amount by deducting allowable expenses from your company turnover.

The following are some of the allowable expenses to consider.

  • Insurance expenses
  • Advertising and marketing costs
  • Health check expenses
  • Accommodation and transport
  • Bank charges
  • Phone bills and subscriptions such as magazines and journals
  • Equipment and professional development expenses

Some regulations focus on these allowable expenses. For example, they should only be incurred wholly and exclusively during the day to day running of your business. You also cannot claim for dual-purpose expenses, primarily those without a clear line between business and personal reasons.

You may offset many of the company expenses against your business’ corporate excise liability.

Contractor Expenses

There are also contractor expenses you can claim if your company works on a contractual basis. Expenses, in general, will reduce your profit margin and subsequently reducing your taxable profit.

Travel, food and accommodation are some of the typical contractor expenses that you can claim. You may also add health and working from home costs.

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Types Of Business Tax

There are several levies to know when you are running your company for compliance purposes. The following are some of them payable to Her Majesty’s Revenue and Customs (HMRC).

  Corporation Tax

As a private limited company, you have the obligation of paying corporation duty, which is levies on profits you make. Since 2015, the corporation tax rate is 19%. “ring-fenced profits” are taxed at a different rate and relate solely to companies involved in oil rights or extraction.

The directors have nine months from the end of their accounting period, which cannot exceed 12 months, to settle the corporation tax for that period. There may be a relief for the company if it has trading losses in previous financial years.

VAT

VAT is another tariff to remit, irrespective of the nature of your business. You have to submit your company’s VAT returns every month, three months or year to the HMRC, with the return recording the total sales and purchases for the period being reported on, the VAT amount you owe, reclaimable VAT, VAT refund from the taxation authority.

Income Tax

Company directors are required to submit a self-assessment tax return every year. The main reason for this is to declare any dividend income they may have received.  For income below the personal allowance of £12500, you pay 0%. For £12,501 to £50000, the rate is 20% on your income and 40% if you earn between £50001 to £150000. If you make more than £150000 you will go into the additional rate band of 45%. The income tax year runs from 6th April to the 5th April the following year and you have ten months to pay HMRC and monies due.

Limited Company Tax and Dividends

Dividends are payments made to company shareholders from company profits. Dividends do not count as business costs; therefore, you do not put them under allowable expenses.

There is a tax-free dividend allowance of £2000pa. Any dividend payment above £2000 is taxed dependant on your marginal tax rate.  A basic rate taxpayer will pay 7.5% and higher ratepayer it jumps up to 32.5% and for the additional ratepayer, it is 38.1%.

Furthermore, understand about tolls on the director’s loan, where directors loan is any money paid out that is not salary or dividends. There should be records on such payments as there is a levy imposed on this amount. More information is available on our blog about Directors Loan accounts.

Starting a limited company is one way of expanding your business operations, but you must keep many factors in mind. The first understanding to have is that the company exists as a separate entity from the founders and shareholders. Additionally, take note of the various expenses the company will incur.