How Much Tax Do Limited Companies Pay in the UK?

Running a limited company comes with its fair share of responsibilities, and understanding taxes is right up there on the list. Taxes can feel like a maze at first, but getting a handle on what you owe and when to pay can save you a lot of stress, and money, in the long run.

For limited companies, the main tax to tackle is Corporation Tax, which is calculated on your business profits after expenses and salaries are deducted.

Unlike sole traders, limited companies don’t pay income tax directly on profits. Instead, you’ll pay Corporation Tax, currently set between 19% and 25%, depending on your company’s earnings.

On top of that, there’s VAT and employer National Insurance contributions to take into account, depending on your business setup. Sounds like a lot? Don’t worry, we’ll break it all down so you know exactly what’s expected and how to stay on top of it.

Understanding Limited Company Taxes

Limited company taxes are distinct from taxes for sole traders or partnerships due to the unique legal and financial structure of the business. A limited company is treated as a separate legal entity, which means it pays taxes on its profits rather than passing them directly to owners or shareholders. Exploring these differences helps you manage your tax liabilities effectively and stay compliant with regulations.

Corporation Tax: The Core Obligation

Corporation Tax is central to your limited company tax responsibilities. It's calculated on taxable profits, which include any income from trading activities, investments, or asset sales exceeding their original value. After deducting allowable expenses like wages, rent, and utilities, the remainder forms the taxable profits.

Currently, Corporation Tax rates range from 19% to 25%, depending on your company's profit levels. Businesses with lower earnings remain at 19%, while those with profits over £250,000 pay closer to the upper threshold. Paying this tax requires filing a CT600 form to HMRC, usually submitted online as part of your annual accounts process. Once filed, you have up to nine months and one day to make the payment.

VAT and When It Applies

If your company's turnover exceeds £85,000 in a 12-month rolling period, registering for Value Added Tax (VAT) is mandatory. VAT is added to the sale of goods or services, with standard rates at 20%. But, some goods qualify for reduced rates, such as children's car seats or energy supplies taxed at 5%. By adequately tracking turnover, you can maintain compliance and avoid late registration penalties.

If your turnover is below the VAT threshold, you can still choose to register voluntarily to claim back VAT on business expenses. This option works well for businesses investing heavily in taxable goods or services. Remember, once registered, VAT returns must be filed quarterly.

Employers' National Insurance Contributions (NIC)

If your company employs workers or if you, as a director, draw a salary above the secondary threshold (£9,100 annually in 2023-2024), you'll need to make Employers' NIC payments. This amount is 13.8% of salaries or wages exceeding the specified threshold. Directors frequently manage their salaries to minimise NIC liabilities by combining lower salaries with dividends.

Personal Tax Implications for Directors

As a director or shareholder, you'll face personal tax responsibilities. The salary drawn from the company is taxed under PAYE (Pay As You Earn), while dividends are subject to different rates after utilising the £1,000 annual dividend allowance. In 2023-2024, basic-rate taxpayers pay 8.75% on dividends, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%. Striking the right balance between dividends and salary can optimise your overall tax payments.

Tips for Managing Limited Company Tax Obligations

• Plan salaries and dividends: Work with professionals to strike an effective balance that minimises PAYE and NIC costs but maximises personal income within legal allowances.

• Track deductible expenses: Keep accurate records of business costs, including travel, software, and utilities, to reduce taxable profit.

• Use allowances and reliefs wisely: Explore opportunities like the Annual Investment Allowance (AIA) or Research and Development (R&D) tax reliefs.

• Work with an accountant: Partnering with qualified experts ensures accurate filings, proactive tax planning, and peace of mind.

Understanding these obligations and accessing professional advice helps maintain compliance and reduce stress around finances.

Corporation Tax Rates

Understanding Corporation Tax rates is critical for managing your limited company’s tax obligations. The rates you pay depend on your profits and accounting period.

Current Tax Rates

For the financial year starting 1 April 2024, the main Corporation Tax rate is 25%. This applies to companies with profits exceeding £250,000. If your profits are under £50,000, the small profits rate of 19% applies. For profits between £50,000 and £250,000, a marginal relief mechanism creates a sliding scale of rates, gradually increasing the effective tax rate up to 25%.

Companies with associated businesses divide the thresholds (£50,000 and £250,000) between the total number of those companies. For example, if your company has two associated companies, the upper threshold reduces to £83,333. Short accounting periods also reduce these thresholds proportionately.

A lower tax rate of 10% applies to profits linked to patent exploitation. This favourable rate includes trading profits derived from selling patented products, beyond royalties.

Historical Changes in Rates

Rates have remained stable in recent years. The main Corporation Tax rate for companies with profits over £250,000 was 25% for the financial year beginning 1 April 2023 and continues into 2024 and 2025. Similarly, the 19% small profits rate for companies earning up to £50,000 and the marginal relief band for intermediate profits have remained consistent. These thresholds and their application promote fairness for companies generating varied profit levels.

Before 1 April 2023, the Corporation Tax rate was a flat 19% for all companies, irrespective of profit. The reintroduction of a tiered system emphasises progressive taxation, especially for larger corporations.

Taxable Income Explained

Understanding taxable income is essential for calculating how much Corporation Tax your limited company owes. It's the amount left after deducting allowable expenses from your total income. Ensuring accuracy in these calculations helps you manage cash flow better.

What Counts as Taxable Income

Taxable income includes all profits generated by your limited company, whether from trading activities, investments, or the sale of business assets. For example:

• Trading profits: Revenue from selling goods or services minus allowable business expenses.

• Investment income: Earnings from interest, dividends, or rental income received by the company.

• Asset disposals: Profits from selling business equipment, property, or inventory.

It's important to maintain records of all revenue streams and classify them correctly. For example, income from an asset sale can attract different tax rates compared to trading profits. Keeping detailed records reduces risks during HMRC audits and ensures compliance.

Deductions and Allowances for Limited Companies

Taking full advantage of deductions and allowances can significantly reduce taxable income, helping your company retain profits. Here's a breakdown of commonly used ones:

• Business expenses: Qualify for deduction if they're wholly and exclusively for business purposes. Common examples include rent, salaries, utilities, and marketing.

• Capital allowances: Enable you to claim tax relief on investments in assets like machinery, vehicles, or technology. For instance, under the super-deduction allowance, you can claim 130% relief on qualifying assets until March 2023.

• Research and Development (R&D) tax credits: Reward innovation by offering up to 33.35% relief on R&D expenditure, even for unsuccessful projects.

• Annual investment allowance (AIA): Provides up to £1,000,000 in tax relief for business purchases like equipment or tools.

• Loss relief: Lets you offset trading losses against other income or carry them forward to future tax years. Constraints like the cap on Income Tax relief apply.

Using accounting software or working with a professional accountant ensures you don't miss out on these opportunities. Accountant Connector, for example, helps pair businesses with trusted professionals adept at lowering taxable income through legitimate deductions and reliefs. Leveraging such expertise enhances the financial health of your company.

Always stay updated with current regulations to adapt accordingly. For instance, contribution limits for pensions have changed, permitting £60,000 annually as a deductible company expense starting FY 2024.

Other Taxes Limited Companies May Face

Limited companies may encounter additional tax obligations depending on their size, structure, and business activities. Understanding these taxes ensures compliance and allows you to optimise your financial strategy.

VAT (Value Added Tax)

VAT applies to most goods and services sold in the UK. If your VAT-taxable turnover exceeds £90,000 within 12 months (effective 1 April 2024), registration is mandatory. It's also required if you anticipate exceeding this threshold in the next 30 days or if your company supplies goods or services to the UK from outside the country. Once registered, you'll need to charge VAT on your products, submit quarterly VAT returns, and remit any owed VAT to HMRC.

Smaller businesses with a turnover below the threshold may voluntarily register for VAT. This option can allow you to reclaim VAT on business purchases like equipment, utilities, and materials, helping reduce expenses. Voluntarily registering might suit you if you frequently buy VATable goods or aim to appear more established to clients. But, weigh this benefit against the administrative burden of compliance before deciding.

Accurate record-keeping is essential, whether filing VAT quarterly or using the Flat Rate Scheme for simpler returns.

Employers' National Insurance Contributions

Limited companies with employees are liable for Employers' National Insurance Contributions (NICs). This tax applies to salaries above the Secondary Threshold (£9,100 for 2024/25), at a rate of 13.8%. Registered employers calculate and pay these contributions alongside employee pay under the PAYE system.

An Employment Allowance of £5,000 may reduce your NIC liability, making it a valuable relief for smaller employers. To qualify, annual NIC bills must not exceed £100,000, and certain exclusions apply. Taking advantage of this allowance could significantly lower your costs.

Directors drawing a salary from the company also fall under NIC rules. Balancing salaries and dividends strategically helps optimise tax efficiency. Many use a tailored payroll system or professional advice to navigate thresholds and apply allowances correctly, ensuring accurate reporting to HMRC.

How To Calculate Corporation Tax

Calculating Corporation Tax involves determining the taxable profits of your limited company and applying the correct tax rate. Taxable profits include trading income, investments, and gains from the disposal of assets, minus allowable expenses and deductions.

Steps To Work Out the Tax Due

1. Calculate total income

Add all forms of income your company earned during the financial year, including sales revenue, investment income, and profits from asset sales. For instance, a company generating £300,000 from sales and £20,000 from investments has a total income of £320,000.

2. Deduct allowable expenses

Subtract business expenses incurred solely for company operations. Examples include rent, utilities, employee wages, and certain travel costs. For clarity, allowable expenses exclude personal costs, such as suits for meetings.

3. Claim deductions and reliefs

Use available allowances and reliefs to lower taxable income. Examples include Annual Investment Allowances for equipment purchases or R&D tax credits for innovation expenses. For example, if £50,000 qualifies as an R&D expense, you can claim it to reduce your taxable income.

4. Subtract capital allowances

Deduct capital allowances for business assets like machinery or vehicles. For example, claiming 100% of the cost of a £25,000 machine under the Annual Investment Allowance reduces taxable profits directly.

5. Apply loss relief

Offset current or previous losses against taxable profits. For instance, a £10,000 loss from the previous year can reduce current taxable income from £100,000 to £90,000.

6. Determine the correct tax rate

Apply the applicable Corporation Tax rate based on profits. Use the small profits rate of 19% for taxable profits under £50,000, while profits above £250,000 are taxed at 25%. Marginal relief is available for profits between £50,001 and £250,000, gradually increasing the rate.

7. Calculate tax payment

Multiply taxable profits by the Corporation Tax rate. For example, profits of £80,000 at 19% equate to a £15,200 tax liability.

Tips for Efficiency and Accuracy

• Maintain detailed records

Track income, expenses, and asset purchases during the year. Accurate financial records simplify calculations and reduce errors during filing.

• Use accounting software

Invest in reliable accounting tools for automated calculations. These guarantee compliant tax processes and provide accurate reports for filing.

• Seek expert advice

Engage a professional accountant to optimise deductions and guarantee compliance. Accountants identify additional allowances like R&D tax credits and make best possible use of reliefs.

By following these steps and tips, you can calculate Corporation Tax efficiently while ensuring compliance with HMRC regulations.

Tips To Minimise Tax Liability Legally

Reducing your company’s tax bill within legal boundaries requires using allowances, efficient planning, and strategic approaches.

Using Allowances and Reliefs

Allowances and reliefs are fundamental to reducing taxable profits. They enable you to deduct certain costs and investments directly from your income before Corporation Tax is applied. The Annual Investment Allowance (AIA), currently set at £1 million until 31 March 2023, allows you to claim 100% tax relief on qualifying plant and machinery purchases in the same financial year. For example, if your company invests £800,000 in equipment, you can immediately deduct this from your taxable profits.

Capital allowances also apply to other fixed assets. If an asset exceeds the AIA cap, it falls under the writing-down allowance at 18% for standard equipment or 6% for long-term assets like building fixtures. Research and Development (R&D) tax credits offer relief for innovative projects. For instance, qualifying small companies can receive an additional deduction of up to 130% on R&D costs, significantly reducing tax liabilities.

Loss relief is another powerful tool. If your business incurs a loss, you can offset it against profits from the previous year, reducing taxable income. Alternatively, unused losses can carry forward to offset future profits. Keeping detailed records ensures you can maximise these reliefs effectively.

Planning for Tax Efficiency

Tax efficiency comes down to strategising your income and expenses to lower liability legally. Salary and dividend planning is a popular method for company directors. By balancing a reasonable salary with dividend payments, you minimise income tax and National Insurance, while maintaining Corporation Tax obligations. For example, taking a salary just below the National Insurance threshold and the remainder as dividends can reduce your overall tax bill.

Claiming for genuine business expenses is equally indispensable. Expenses purely for commercial use, such as travel, uniforms, office supplies, or financial services, are deductible. Guarantee that these costs are wholly and exclusively for the company—personal use disqualifies an expense. For instance, laptops purchased for business qualify, but any significant private use of these assets triggers an add-back when calculating tax.

Consider perks like tax-free incentives. Some benefits, such as mobile phones or employee assistance schemes, can be provided without tax implications, offering relief for the company. Also, if you work from home, you can claim deductions for a proportionate share of utility bills, broadband, or mortgage interest.

Finally, reviewing your VAT scheme can make a difference. Flat-rate VAT schemes simplify administration and may save money for businesses with limited VAT-charged expenses. For turnover under £85,000, voluntary VAT registration allows you to reclaim VAT on purchases, though additional administrative costs should be weighed.

Strategic tax preparation ensures compliance with HMRC while lowering liabilities. Collaborating with accounting experts creates opportunities to explore savings unique to your business model.

Conclusion

Exploring the tax world as a limited company can feel complex, but with the right knowledge and planning, it becomes manageable. Staying informed about Corporation Tax rates, VAT obligations, and allowable deductions ensures you're not paying more than necessary.

By keeping accurate records, utilising tax reliefs, and seeking expert advice when needed, you can optimise your tax position while remaining compliant with HMRC rules. Proactive tax management not only saves money but also supports the long-term success of your business.

Frequently Asked Questions

Do all limited companies pay the same Corporation Tax rate?

No, Corporation Tax rates depend on profit levels. A small profits rate of 19% applies to profits under £50,000, while the main rate of 25% applies to profits above £250,000. Marginal relief is available for profits between £50,000 and £250,000.

When does a company need to register for VAT?

A company must register for VAT if its taxable turnover exceeds £85,000 in a 12-month period. Businesses below the threshold may voluntarily register to reclaim VAT on expenses, but should consider administrative responsibilities.

What expenses are deductible for limited companies?

Allowable expenses include business-related costs such as office supplies, travel, salaries, and equipment. Additional allowances like R&D tax credits, capital allowances, and loss relief help reduce taxable income and Corporation Tax liability.

How can directors reduce their tax liability?

Directors can optimise tax efficiency by balancing salaries and dividends, claiming legitimate business expenses, contributing to pensions, and leveraging reliefs such as the Employment Allowance. Strategic planning with an accountant is highly recommended.

What is the marginal relief for Corporation Tax?

Marginal relief applies to profits between £50,000 and £250,000, gradually increasing the Corporation Tax rate from 19% to 25%. This ensures businesses with mid-range profits face a tapered tax rate rather than a sudden jump.

Are directors personally taxed on company profits?

Directors are not taxed directly on company profits. Instead, they pay Income Tax on salaries and dividends received from the company. Strategic dividend planning can reduce personal tax liability.

What is the Annual Investment Allowance (AIA)?

The AIA allows companies to claim 100% tax relief on certain capital expenditures, like equipment and machinery, up to £1 million annually. This reduces taxable profits and, in turn, the Corporation Tax bill.