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Menu MenuRunning a limited company can be daunting for new business owners. Especially if you’re moving your business from a sole trader to a limited company. You need to know about many more things, such as how to run a limited company? How do I take money from my company? What do I need to do to comply with company law? Do I need to register for PAYE and VAT? How much tax will I pay? Do still need to submit a personal tax return? We will guide you through all of the common questions in easy to understand language.
A company is a business which is a separate legal entity to its owners. Until registered at Companies House, a company does not exist. From that point, information about the company is publicly available at Companies House. This includes addresses, directors, shareholders, shares and accounts.
Being a separate legal entity is an important point to distinguish a company from a sole trader. A sole trader is an individual’s business, they are one and the same. The sole trader’s business and money is the individual’s business and money. An individual pays tax as and when their sole trade business makes a profit. However, a company’s money is its own money, not any individual’s. A company pays tax on its profit. An individual would only pay tax if they receive money from a company.
You set up a new limited company with an amount of money e.g. £100 that should always stay in the company. We call this money is share capital and it represents a number of shares at a cost per share, e.g. 100 £1 shares. The company effectively sells each share to an individual called a shareholder who then owns part of the company. In a small company there are usually only one or two shareholders, so they would own all or half of the shares. As a reward for the investment from shareholders the company pays profits to shareholders which is a dividend. Shareholders would usually also be directors who are responsible for running the company.
Every company must have at least one director. A director is a person responsible for running the company and must ensure it complies with company law. As a reward for the work they do, a director receives a salary.
As it’s a separate legal entity, a company must have its own bank account, in the company’s name (with Limited or Ltd). This is to ensure the money belonging to the company is kept separate from the director/shareholder’s money. Otherwise, all of the money received should be treated as received by the owner of the bank account. That person is then taxed as if they took all of the money from the company.
Directors must ensure that there is an up to date record of all of the company’s financial transactions. They must also prepare accounts which show how much profit a company has made over a period. The accounts also need to show how much a company owns and owes at the end of a period. The accounts should be prepared on a regular basis and provided to shareholders, Companies House and HMRC annually. We recommend using online accounting to make this easier and some are free. With online accounting you can import bank transactions and send invoices on the go. However, you could also do the company bookkeeping using spreadsheets.
More on accounting using software and spreadsheets.
As well as company accounts, there are other forms that must be sent to Companies House. A director must update the information held by Companies House about a company whenever anything changes. For example, if a director moves home they need to update their address though the home address is not on public record. Every year a director needs to confirm that the details at Companies House are correct using what’s called a Confirmation Statement. An annual fee is also payable to Companies House (currently £13).
HM Revenue and Customs are responsible for collecting taxes from a company. This would at least be corporation tax, which is a tax on the profit a company makes. At least every 12 months a company must submit a corporation tax return to HMRC, together with accounts for that period. It could also be PAYE/NIC, CIS tax, VAT etc.
A company will need to register for other taxes as and when necessary. The directors are responsible for registering at the correct time and they must not wait to be told to do so. Companies are automatically registered for corporation tax, but not for PAYE, VAT, CIS etc. A company must register for PAYE if it pays wages to anyone. It takes several weeks to receive the PAYE reference numbers so plan ahead. VAT registration is compulsory from the time sales exceed £85,000 in any 12 month period (a monthly test). It may be worth voluntarily registering for VAT if customers are VAT registered. A company must register on the Construction Industry Scheme (CIS) if it is a contractor or hires subcontractors in the construction industry. This includes typical trades like electricians and plasterers as well as builders.
Whatever the company does, it needs to comply with any laws and regulations that apply. For example, if it sells food, it must comply with the relevant laws and regulations about selling food, such as hygiene and labelling. If it employs anyone, it must comply with employment laws and regulations such as health and safety and pensions. Directors are responsible for ensuring that the company complies with all relevant laws and regulations.
If directors or employees spend their own money on business costs, they can claim this back from the company as expenses. As long as the costs were necessary for the director to perform their job, there are no tax implications for receiving expenses from the company.
Directors can only be paid by a company with a salary. A director can also be a shareholder, and as a shareholder they can also receive dividends (see below). If a company pays anyone wages of over £123 per week (2023-24), or pays anyone who has received other employment income or benefits in the same tax year, it must register with HMRC an an employer. If the company is registered as an employer, all wages must be reported to HMRC as and when they are paid, and at least monthly if none are paid. The recommended salary for a director-shareholder of a profitable company is £12,570 (2023-24). This salary is usually free from income tax and employee’s NIC. On the salary amount exceeding £9,100pa, it may cost the company Employer’s NIC at 13.8%. However, the company may save corporation tax on the whole salary at 19% or more.
More on a directors salary.
A company can pay its shareholders with payments called dividends if it has sufficient profit reserves. Profit reserves are all the profits or losses a company has made since it was first registered, minus all of the dividends it has paid since it was first registered. The profit reserves amount can usually be found in the company’s accounts. Either at the bottom of the company’s profit & loss account or at the bottom of the balance sheet. It can also be called retained earnings and, confusingly, the profit & loss account.
If you want to work out profit reserves, the taxable profit in one period is calculated as income, minus allowable expenses (including salaries). You need to deduct corporation tax from that taxable profit at between 19% (small profits) and 25% (large profits) to calculate the net profit. Then you deduct any dividend payments from the net profit to calculate the retained profit/earnings for that year. All of the retained profit/earnings for all of the years so far are added together to calculate the profit reserves.
Unlike a salary, dividend payments don’t reduce corporation tax. They are paid from profits after tax. So effectively they have already been taxed at 19% or more. Individuals pay tax on dividends received in a tax year. The first £1,000 (reducing to £500 from 2024/25) of dividends are taxed at 0%. Dividends received in the basic rate band (total income up to £50,270) are taxed at 8.75%. The tax rate increases to 33.75% in the higher rate band. Then 39.35% in the additional rate band (on total income over £125,140).
More on Dividends
If a director-shareholder receives money from a company that is not expenses, salary, or a dividend, then it needs to be treated as a loan from the company. The loan goes into a directors loan account, where it is added to other loans taken. Or it is offset against money loaned to the company, or money owed to the director/shareholder such as unpaid expenses, unpaid salary, or unpaid dividends.
If the balance on the directors loan account exceeds £10,000 owed to the company, it must charge interest. The interest charge must be at the HMRC beneficial loan rates or more. Otherwise, the interest that should have been charged on the loan is taxed as a benefit in kind. Which means income tax is payable by the director/shareholder and NIC payable by the company.
At the end of the accounting year, the director/shareholder may owe money to the company. If so, the balance on their loan account must be repaid to the company within 9 months from the end of the accounting year. Otherwise, the remaining balance is taxed on the company at 33.75%. This tax is eventually refunded to the company after the year in which the loan is repaid. The loan account can be repaid in several ways or a combination of any of them. Money can be transferred from the director/shareholder to the company. A dividend can be declared but instead of paying that dividend it can be used to repay the loan account. Wages can be processed through the payroll but credited to the loan account instead of being paid. Or the director/shareholder can claim expenses but not be paid those expenses.
More on Directors Loan Accounts. And here. And here.
A company pays tax on its taxable profits at between 19% and 25%. Its profits are its sales minus costs. Costs include salaries but but not dividends or loan payments. The accounting profits are adjusted for non-taxable things like the cost of using business equipment (depreciation), to get the taxable profits. If these profits are less than £50,000pa, and there are no other related companies, the profits are taxed at 19%. If they are over £250,000pa (no related companies), the tax is 25%. A profit between these levels is taxed at a rate between 19% and 25%. To calculate it work out 19% on £50,000, then 26.5% on the profit exceeding £50,000.
More on corporation tax rates.
As an employer the company does not suffer PAYE or Employees NIC. However, it may have to deduct these taxes from the employee’s pay and pay it over to HMRC. An employer may also have to pay (and suffer!) Employers NIC. This applies to pay over £9,100pa and on any benefits in kind provided at 13.8%.
Employees (including directors) usually pay PAYE on salaries over £12,570pa. This will be at 20% on salaries within the basic rate band (total income up to £50,270). It increases to 40% on income in the higher rate band and 45% in the additional rate band (total income over £125,140).
Employees also pay NIC at 12% on salaries between £12,570 and £50,270. Then 2% on the salary above this level.
A business not registered for VAT does not need to add 20% VAT onto their sales. It also can’t claim any VAT back on costs, so VAT paid out on costs is just part of the cost, just like it is to most people.
VAT registered businesses don’t ‘suffer’ VAT. It’s not a cost or an income to them. However, they have to pay the VAT they have collected to HMRC. The company must pay to HMRC, the VAT received on sales to customers, minus the VAT paid on purchases from suppliers. The VAT payments and VAT returns are usually quarterly.
See above for the tax on dividends.
All sole traders need to submit a personal tax return to report their profits and pay the tax on those profits. You may think that if you use a company, the company pays tax on the profit so you no longer need to submit a personal tax return. However, you must still submit a personal tax return if any of the following apply:
If you do need to submit a tax return for the first time, you will need to register for your tax reference (UTR). Search ‘register for self assessment tax return’ and follow the HMRC instructions.
There are many things to consider if you want to run a limited company. Hopefully, this gives you a good introduction on the main considerations. Our clients can get further advice, all included in our fixed monthly fees.
About Us Our Prices Instant QuoteA director’s salary is a good way to take money out of a company. But how much salary should a director receive? How do you give yourself a director’s salary? How do you account for director’s wages? Here we’ll explain everything you need to know about a director’s salary.
There are two main ways a small company can pay its owner managers. As directors they can receive a salary. As shareholders they can receive dividends if the company has made enough profit. Dividends are paid from taxed profits, so the company does not get tax relief on dividend payments. Whereas a director’s salary is an expense that reduces the company’s taxable profits. So the company does get tax relief on director’s salaries. So a director’s salary is a good way to take money out of a company. This is because it saves the company tax. However, there are other taxes to consider such as PAYE and NIC. So to save the most tax you need to consider how much to pay.
The following are the amounts and rates applicable to the UK. There is no NIC to pay on director’s salaries of £9,100pa or less. Employer’s NIC is payable by the company at 13.8% of the salary exceeding £9,100pa. Employee’s NIC at 12% is deducted from the salary exceeding £12,570pa. PAYE at 20% is usually deducted on wages over £12,570pa. But this could vary depending on the director’s PAYE tax code.
So, directors’ salaries of £12,570 attract Employer’s NIC at 13.8% but save corporation tax at 19% or more. So saves the owner manager more tax overall. However, this is only if the company is profitable or is expecting to be soon. Otherwise, for loss making companies a salary of £9,100 would be best. This is because no tax is payable and it could potentially reduce corporation tax in the future. That’s because you can carry forward a company’s losses to get tax relief in the future.
The amount of salary exceeding £12,570 would attract PAYE at 20%, Employees NIC at 12% and Employers NIC at 13.8%. But it saves corporation tax at 19%-25%. The alternative is to take dividends which are taxed at 8.75% (on total income below £50,270pa). Even if a company saves tax at 25%, dividends will cost the owner manager the least amount of tax overall.
So the best salary to pay a director from a profitable company is £12,570pa. Then they should receive dividends on top of this. See How Dividends Work for more on this.
The minimum director’s salary should be £6,400pa if the director needs qualifying years towards a state pension. This exceeds the Lower Earnings Limit for NIC which is the minimum required to include it on your NIC records. For a full state pension you need 35 qualifying years.
If the company doesn’t have enough profit to pay a salary, it can still go ahead and make a loss. You can use the loss to get tax relief either in the previous 12 months, or in the future.
If the company does not have enough cash to pay a director’s salary, the company can owe it to the director. There is no limit on how much the company can owe to a director, or for how long. So you can process a salary and just add it to a director’s loan instead of paying it.
Unless director’s wages are less than £6,400pa, you need to process the wages through a registered PAYE scheme. The director’s company must register as an employer so that it has the two PAYE reference numbers. The company will then need to submit payroll reports to HMRC every month and every year. It must submit a payroll every time it pays employees if it pays employees more frequently than monthly.
The company will also need to provide payslips, P60 forms, and P45 forms to its employees. It also must pay HMRC every month or quarter, any deductions from wages (e.g. PAYE, NIC, Student Loans). Free or paid software is available to help companies manage their payroll. Some online accounting software comes with payroll or charge extra for it. The benefit of this is it automatically enters the payroll amounts into the accounts. We can do your payroll for you for £11pcm plus VAT per 4 payslips per month.
Your accounts need to reflect the wages processed through a payroll. This is to show an accurate profit/loss and balance sheet. If your payroll software is part of your accounting software it should be easy to update your accounts. The combined software should put all of the payroll amounts in the correct place automatically. So all you need to do is categorise the payments to wages payable and PAYE payable. Otherwise, you will need to adjust your accounts to reflect the wages.
If a company physically pays all wages there is a quick and easy way to account for the wages. However, it’s often not the most accurate. The cash method is to just categorise all of the payments to the wages or salaries expense account. If PAYE/NIC is payable you could also categorise those to the same expense account or to its own expense account. Your accountant will make any necessary adjustments when doing the quarterly or annual accounts.
A more accurate method, or when wages aren’t physically paid, is to add a journal adjustment to your accounts. You can use a journal adjustment to debit the cost of the salaries to expense accounts. A journal must balance so it also credits the amounts payable to liability accounts. Then you need to categorise the payments to the wages payable and the PAYE payable accounts. Credit unpaid director’s salaries to the directors loan account instead of wages payable.
A small director’s salary of £12,570pa is the best way to minimise the overall tax paid by small business owners. If the company has sufficient profit, it can pay dividends on top of that salary. A company will need to register as an employer. It will also need to use software to process the payroll and submit forms to HMRC. Accounts should be up to date with the salaries.
Our clients can receive personalised advice on any of this, all included in our accounts packages from £22pcm plus VAT. We can also do payroll for £11pcm plus VAT per 4 payslips per month.
About Us Our Prices Instant QuoteWe are often asked by startups, sole traders and partnerships: will I pay less tax as a limited company? Yes, you do, but not in all circumstances. Here we’ll explain how to save tax as a limited company. We’ll look at how tax is calculated, compare sole trader v limited company tax, and explain other ways why it is more tax efficient to be a limited company.
Before working out how to pay less tax as a limited company, we should explain: how much tax does a limited company pay. A company pays tax at between 19% for the smallest companies and up to 25% for the largest companies. The percentage applied to the company’s taxable profit to calculate the corporation tax due. To work out the taxable profit, you start with the profit before tax in the accounts. This is its sales minus costs including salaries but before tax and dividends. This profit is then increased for non-taxable costs like depreciation of equipment. Then decreased for non-taxable income and allowances such as the 100% allowance for buying equipment used by the company. The result is the company’s taxable profit.
The rate of tax is determined by the size of the profits. Effectively the first £50,000 of profits are taxed at 19%. The next £200,000 of profits are taxed at 26.5%. It’s more than 25% so that the total tax paid gradually increases from 19% to 25%. Then anything above £250,000 is taxed at 25%. However, these thresholds are divided by the number of associated companies. So if two companies are owned by the same people, there are 2 associated companies, so the thresholds reduce to £25,000 and £125,000.
A sole trader pays tax on his/her profits at the income tax rates, which are 20%, 40% and 45%. Like everyone else a sole trader doesn’t pay tax on the first £12,570 of income. The next £37,700 is taxed at 20%. Then 40% is applied to income between £50,270 and £100,000. The effective tax rate then increases to 60% because the personal allowance is gradually withdrawn between £100,000 and £125,140. Above that income is taxed at 45%.
He/She also pays class 2 National Insurance Contributions (NIC) at a fixed rate of £178 per year unless the profits are less than about £6k. As well as class 4 NIC which is 9% on profits between £12,570 and £50,270 then 2%. The taxable profits are worked out almost the same way as company (see above). A partnership does not pay tax – it’s profits are shared between the partners and that profit is taxed on the partner the same way a sole trader pays tax.
Yes. Simply comparing the rates above, you do pay less as a limited company compared to a sole trader or partnership. A company pays tax at between 19% and 25% which is less than a sole trader at between 20% plus NIC of 9%, and 45% plus NIC of 2%. However, that’s not the full picture unless you intend to leave all of the money in the company. Which of course is one way how to save tax as a limited company. However, most director/shareholders need something to live off!
It is more tax efficient to be a limited company if directors/shareholders take a small salary of £12,570 plus dividends. The salary is tax-free for the employee but the employer will pay 13.8% NIC on the amount exceeding £9,100. Dividends are the company’s profits paid out to shareholders. The first £1,000 (£500 from 2024/25) of dividends are tax-free. Then they are taxed at 8.75% up to the higher rate threshold of £50,270. Then 33.75% up to £100,000. After that, there’s an effective 53.75% up to £125,140. Then 38.1% above that. So, adding together the corporation tax rates and the dividend rates, brings us close to the sole trader tax and NIC rates.
All of that is quite confusing and difficult to compare if you’re trying to work out is it more tax efficient to be a limited company or sole trader. So we’ve crunched the numbers at different profit levels to show how much tax do you save as a limited company. The maximum saving is where dividends are limited to the tax-free allowance.
There’s very little tax to pay at this level so there isn’t much difference between the tax as a limited company v sole trader.
| Sole Trader £ | Company £ | |
| Tax | None | None |
| NIC | 179 | 124 |
| Net income | 9,821 | 9,876 |
| Saving | 55 | |
| Maximum Saving | 55 |
So here you start to see a difference between tax as a limited company v sole trader, due mainly to the lower tax rate for companies. The maximum saving if only a salary of £12,570 and £1,000 of dividends start to become noticeable.
| Sole Trader £ | Company £ | |
| Tax | 1,486 | 1,321 |
| NIC | 848 | 479 |
| Dividend tax | 405 | |
| Net income | 17,666 | 17,795 |
| Saving | 129 | |
| Maximum Saving | 535 |
Again the main difference is that companies pays less tax than sole traders at 19% compared to 20%. The higher the profit, the more you’ll save by leaving money in the company instead of taking dividends. Where as all of a sole trader’s profits are taxed whether you take them or not.
| Sole Trader £ | Company £ | |
| Tax | 3,486 | 3,221 |
| NIC | 1,748 | 479 |
| Dividend tax | 1,114 | |
| Net income | 24,766 | 25,187 |
| Saving | 421 | |
| Maximum Saving | 1,535 |
As above, nothing much has changed in terms of the percentage of tax rates paid by a sole trader or limited company.
| Sole Trader £ | Company £ | |
| Tax | 5,486 | 5,121 |
| NIC | 2,648 | 479 |
| Dividend tax | 1,823 | |
| Net income | 31,866 | 32,578 |
| Saving | 712 | |
| Maximum Saving | 2,535 |
As above, nothing much has changed in terms of the percentage of tax rates paid by a limited company or sole trader.
| Sole Trader £ | Company £ | |
| Tax | 7,486 | 7,021 |
| NIC | 3,548 | 479 |
| Dividend tax | 2,531 | |
| Net income | 38,966 | 39,969 |
| Saving | 1,003 | |
| Maximum Saving | 3,535 |
Now it is much more tax efficient to be a limited company than a sole trader. That’s because the higher tax rate for a sole trader has kicked in. But the company is still paying low rates due to the salary reducing its profit. Also, the tax reduces the amount of dividend that can be taken so that it only just creeps into higher rates.
| Sole Trader £ | Company £ | |
| Tax | 11,432 | 8,921 |
| NIC | 3,767 | 479 |
| Dividend tax | 3,323 | |
| Net income | 44,801 | 47,278 |
| Saving | 2,477 | |
| Maximum Saving | 5,799 |
So, we’re past the peak of when you pay less tax as a limited company v sole trader. But it is still more tax efficient to be a limited company. This is because the sole trader NIC rate has dropped to 2%. The company tax in now into the 26.5% band. Also, the dividend rate has increased to 33.75%.
| Sole Trader £ | Company £ | |
| Tax | 15,432 | 11,469 |
| NIC | 3,967 | 479 |
| Dividend tax | 5,838 | |
| Net income | 50,601 | 52,214 |
| Saving | 1,613 | |
| Maximum Saving | 7,451 |
As above, the rates are now higher as company. However, the maximum savings continue to grow. And with more profit there’s more scope to leave money in the company to reduce your dividend tax and pay less tax as a company.
| Sole Trader £ | Company £ | |
| Tax | 19,432 | 14,119 |
| NIC | 3,988 | 479 |
| Dividend tax | 8,318 | |
| Net income | 56,401 | 57,084 |
| Saving | 683 | |
| Maximum Saving | 9,001 |
Finally, if you are going to take all of the money out of the business, you now pay less tax as a sole trader. However, with this much profit, paying a little more tax to have all the benefits of trading as company must be worth it.
| Sole Trader £ | Company £ | |
| Tax | 23,432 | 16,769 |
| NIC | 4,367 | 479 |
| Dividend tax | 10,799 | |
| Net income | 62,201 | 61,953 |
| Saving | -248 | |
| Maximum Saving | 10,551 |
Again the maximum savings continue to grow but the sole trader pays less tax if all the profits are taken out of the company.
| Sole Trader £ | Company £ | |
| Tax | 27,432 | 19,419 |
| NIC | 4,567 | 479 |
| Dividend tax | 13,280 | |
| Net income | 68,001 | 66,823 |
| Saving | -1,178 | |
| Maximum Saving | 12,101 |
You pay less tax as a limited company v sole trader at all profit levels if you keep enough profit in the company (e.g. £3,500 at £100k). It is also more tax efficient to be a limited company if you take all of the profit out when profits are up to about £87k.
Company owners have been hit with increases to dividend tax over the past few years. Now they have a potential corporation tax increase of up to 6%. Company owners with large profits may soon be paying more tax as a limited company compared to a sole trader or partnership. However, there are other ways to save tax by using a company. Also, there are benefits to trading through a company such as protection of your personal assets (home etc), and prestige. Read more about the non-tax benefits of trading as a company here.
Company owners can choose whether or not to take dividends from their company’s profits. They only pay tax on the dividends taken, so by leaving profits in the company, owners will save tax. Whereas sole traders and partnerships pay tax on the profits made, regardless of how much money they take out of the business.
If a company has one owner, only that owner can take dividends from the company. So all of the profits taken out of the company (as a dividend) are taxed on that one owner. Which could mean they pay higher rates of tax if their total income for the tax year exceeds about £50k. However, say a husband and wife own the company 50% each. Both the husband and wife will be able to receive dividends from the company. The total dividend is split into two – 50% each. So the dividends received per owner is halved. If that means both owners pay lower rates of tax on the dividends, rather than the one owner paying a higher rate of tax, the family saves tax overall.
For example, a company has retained profits of over £100k and the directors decide to pay a dividend of £100k. So, if there’s only one shareholder (owner), and they have no other income in the tax year, they will pay no tax on £13k, lower rates of tax on £37k and higher rates of tax on the other £50k. This is a total tax of about £20k. However, if there are two 50% owners, they will each receive £50k. Then if they have no other income, they will each pay no tax on £13k, and lower rates of tax on £36k. A total tax of about £6k. That’s a total saving of about £14k! You could take this further by making adult children shareholders too. You can also own the company in different proportions e.g. 75%/25%, so that the total dividend is split 75%/25%.
If each owner’s other income is different and varies from year to year, the company could create different types of owners, so that it can pay different dividends to each owner. A company does this by having different types of shares. For example, instead of having 100 ordinary shares, a company could have 50 A shares and 50 B shares. If one owner owns all the A shares and the other owner owns all the B shares, they both still own the company 50% each. However, they can each receive totally different dividends.
So let’s say the company wants to pay a total dividend of £80k, and the B shareholder has other income of £20k. If the B shareholder was to receive a 50% dividend of £40k, their total income would be £60k. So they would be paying higher rates of tax on £10k of that dividend. However, the company can pay £50k to the A shareholder and £30k to the B shareholder. That way they both stay under the £50k higher rate threshold, so they both pay lower rates of tax.
As a company is a separate legal entity to you, the director/shareholder, you can take profits out in other ways.
You could charge the company rent for using part of your home using what’s called a licence agreement. The rent received is taxable income, however, you can deduct proportion of your home costs from the rent. So there is no/little tax payable. This is the only way of claiming rent or mortgage interest as an expense.
If you loan money to the company you could also charge it interest on that loan. The interest is taxable but only if your interest is more than the tax-free savings allowances. The company also has to deduct income tax from the interest but that’s taken into account on your tax return.
So hopefully you now know how to pay less tax as a limited company compared to a sole trader. To summarise you can either 1) have less than £87k profit, or 2) keep enough profit in the company, or 3) share the company with your family, or 4) take funds out in other ways. We don’t charge any fees for registering a new company for new or existing clients. New clients are asked to pay the first month of their accounts fee. Companies House charge a fee of £12 for a new company and then £13 per year.
Our clients receive proactive advice like this throughout the year and before the end of the year. All included in our low monthly fixed fees. Follow the buttons below to see our prices and to receive an instant quote.
About Us Our Prices Instant QuoteCorporation tax rates increase on 1st April 2023 for many companies. We will explain how your corporation tax rate changes from April 2023. You will need to know your expected annual net profit and the number of companies associated with yours.
From 1st April 2023 the UK main corporation tax rate increases from 19% to 25%. However, some companies will pay between 19% and 25%, depending on the profit for the year and the number of associated companies.
The relevant profit to use is the company’s taxable profit for the year. To find this you need to start with the company’s net profit. This is its sales, plus other income, minus costs like salaries and depreciation but not dividends and not corporation tax itself. Then you add back onto the net profit any costs that are not tax deductible such as depreciation and entertainment. Deduct any income that is not taxable such as dividend income. You can also usually deduct the cost of equipment purchased during the year, which is called a capital allowance. Now you should be close to the taxable profit, which is relevant to work out your tax rate.
You also need to know the number of companies associated with yours. For this you’ll need to read our separate post: what is an associated company? If you have associated companies you’ll need to read the Reducing The Corporation Tax Thresholds section below.
The lower limit is £50,000 and the upper limit is £250,000. So if you have no associated companies, you’ll pay corporation tax at 19% if your profits are less than £50,000. You’ll pay 25% corporation tax if your profits are over £250,000. If your profits are between these thresholds, you’ll pay a total rate on all of the profits somewhere between 19% and 25%. It’s tapered so that if you’re just over £50,000 you’ll pay just over 19%. Similarly if you’re just under £250,000 you’ll pay just under 25%.
The tax thresholds need to be divided by one plus the number of associated companies. So if you have one associated company, add one (for your own company) to make two. Then divide the thresholds by two so the lower one is £25,000 and the upper one is £125,000. So if your profits are £25,000 or less you will pay 19% corporation tax. Or if your profits are over £125,000 you’ll pay 25%.
Also, if your accounting period is shorter or longer than 1 year, you’ll need to proportionally reduce or increase the thresholds. So if you have a 9 month accounting period, the thresholds become £37,500 and £187,500.
The examples below assume that you don’t need to reduce the thresholds. If you have to reduce the thresholds, you will need to reduce the £50,000 and £250,000 referred to below e.g. in the marginal relief formulas.
If your profits are between the thresholds, you use the main rate of 25% on all of your profits. Then there is a marginal relief formula to work out how much to reduce this by. Ignoring dividends received, the formula is (£250,000 – taxable profits) x 3 / 200. So profits of £100,000 would be taxed at 25% which is £25,000 minus marginal relief. Entering £100,000 into the formula makes it £150,000 x 3 / 200, which is £2,250. So the corporation tax is £22,750 which is 22.75%.
Another simpler way to work out the corporation tax is to use the marginal rate of 26.5%. The first £50,000 of profits are taxed at 19%, then the next £200,000 of profits are taxed at 26.5%. Then you add them together. So with £100,000, £50,000 at 19% is £9,500, then the remaining £50,000 is taxed at 26.5% which is £13,250. Added together this gives a total of £22,750.
As the marginal rate between the thresholds is 26.5%, that is the rate of tax you will pay or save on any increase or decrease to your taxable profits within the thresholds. So if it looks like you will have taxable profits of £60,000, paying pension or charitable contributions of £10,000 will save you tax at 26.5% which is £2,650. Wages or a bonus could also work but you will need to consider whether any PAYE and NIC payable will outweigh any corporation tax savings.
If your company receives dividends, these are not taxable but they may affect the corporation tax rate. Dividends received are effectively added to profits when calculating the marginal relief formula. So if your company receives a substantial amount of dividends it could end up paying 25% tax even if its taxable profits are less than £250,000. The full marginal relief formula is (£250,000 – (profits + dividends)) x (profits / (profits + dividends)) x 3 / 200. Or ask your accountant!
Our clients can ask us to estimate what their corporation tax rate from April 2023 is likely to be, all included in our low-cost fixed monthly fees.
About Us Our Prices Instant QuoteThe number of associated companies can affect the tax rate a company pays from April 2023. So companies will need to know what is an associated company to determine its tax rate. UK Corporation tax rates increase from 19% from April 2023 for companies with profits over a small profits threshold. Companies with profits over the main threshold will pay the main tax rate of 25%. Companies between these thresholds will pay a tapered rate. The thresholds are £50,000 and £250,000 but are divided by the number of associated companies. So what is an associated company?
Direct control of a company is usually owning over 50% of the company’s shares. However, it could also be having a majority of: voting rights, income payable to shareholders; or assets distributable on a wind-up. An individual, a group of people, or another company could control a company. Only consider a group of people as controlling, if that group can’t be reduced while still having control. So if John has 35%, Paul has 35%, George, 15% and Ringo 15%, the only controlling group is John and Paul.
Substantial commercial interdependence is when two companies rely on each other in any significant way. For more details on this please read this section in HMRC’s internal manual.
If two companies have substantial commercial interdependence (see above), you also have to consider indirect control of a company. An individual or group of people who don’t have direct control over a company, may have indirect control over it by adding the shares of people they have an influence over. These people include a spouse and blood relatives. So if an individual owns 40% and their spouse owns 11%, that individual indirectly controls the company on their own.
If one company controls another company, they are a group of companies. If the controlling company is controlled by another company and/or also controls other companies, they are all in the same group of companies. The group could be any number of companies – think of a family tree of companies with at least a 50% ownership link between them all.
A company is associated with another company if they are both directly controlled by the same individual or the same irreducible group of people, or they are in the same group of companies. An association also exists if there is substantial commercial interdependence between two companies and the same individual or group of people indirectly control both companies. For an accounting period, you need to include any company that was associated for at least part of the accounting period. You can ignore any companies that are not trading.
Once you’ve worked out which companies are associated with yours, add them all up. Then add one to that total for your own company to get your number. Then divide the £50,000 and £250,000 thresholds by your number. So if you have 1 company that is associated with yours. Add one for your own company, so your number is 2. Then £50,000 divided by 2 equals £25,000, and £250,000 divided by 2 equals £125,000. So you’ll pay 19% tax if your annual profits are less than £25,000. You’ll pay 25% corporation tax if your annual profits are more than £125,000. If you’re inbetween those thresholds, you’ll pay a tapered rate between 19% and 25%. See corporation tax rated from April 2023 for more information.
If you have direct control over more than one company, could you sell some shares in one company so that you no longer control it? If there is no substantial commercial interdependence (see above), you could transfer those shares to a close family member. There’s no capital gains tax to pay on shares transferred to a spouse.
Are any of your companies not making much profit? It may be worth closing that company and moving its business into another company.
Our clients can ask us to help them work out how many associated companies their company has. Also, how they might be able to reduce the number of associated companies. This is all included in our low-cost fixed monthly fees.
About Us Our Prices Instant QuoteDividends are company payments to shareholders from the profits made by that company. If you’re a business owner you’re probably wondering how dividends work for a small company? We’ll explain everything a small company owner/director needs to know about how dividends work.
Dividends are payments by a company to the owners of that company. It is a reward and an incentive for shareholders to buy and continue owning shares in a company. A company can only pay dividends if it has sufficient profit reserves. That’s because dividends are the distribution of a company’s profit reserves to its shareholders. The word ‘dividend’ comes from the Latin word ‘dividendum’ which means something divided. The thing divided is the amount of company’s profit reserves that directors decide to pay. Shareholders receive their share of those profit reserves in the form of a dividend.
Profit reserves consist of a company’s accumulated net profits, minus dividends paid to date. Retained profits, or the profit and loss account are other terms to describe profit reserves. The net profit of a company is its sales, minus its costs, minus any corporation tax payable on that profit. Adding this net profit to any opening profit reserves, then deducting any dividends, leaves the amount of closing profit reserves. This happens every year so that you have a running total of profit reserves.
A company must not pay a dividend if it doesn’t have enough profit reserves to cover that dividend. If it does, that dividend is unlawful. Shareholders and/or directors may need to return unlawful dividends back to the company.
The total ownership of a company is divided into any number of shares. Shareholders are the people or entities (e.g. other companies), that own those shares of a company. For example a company may have a total of 100 shares. If so, each share would represent a 1% ownership of the company. The shareholders own a proportion of the shares that equal the proportion of the company they own. So if there was just one shareholder they would own all 100 shares or 100% of the company. Two shareholders could own anything between 50 shares each, or a split of 99 shares and 1.
This is a very simple example with one type and class of share, usually called Ordinary. A company can have a very complicated share structure with different classes and types of shares. For example it could have different classes of ordinary shares, such as A Ordinary and B Ordinary shares. It can also have different types of shares such as preference shares.
Directors do not receive dividends, only shareholders do. Shareholders appoint directors to run the company. A company can only pay a salary to directors, and only a dividend to shareholders. That’s how dividends work. However, in many small companies shareholders are also directors.
Shareholders receive a share of the dividend in proportion to the number of shares owned compared to the total. Another way to put it, is that a company pays dividends at the same rate per share. So let’s say there are 100 shares in total, of which Mrs Smith owns 60 and Mr Jones owns 40. If the directors decide to pay a dividend of £10,000, that’s a rate of £100 per share (£10,000 / 100). So £6,000 (£100 x 60) is payable to Mrs Smith and £4,000 (£100 x 40) is payable to Mr Jones.
The procedure and advice on how dividends work in practice is as follows:
If you have any other questions about how dividends work, let us know. Our clients receive advice like this included in all of our fixed fee accountancy packages.
About Us Our Prices Instant QuoteAdvantages of a private limited company
The main advantages of a private limited company or a Limited Liability Partnership (LLP) is the protection from unlimited liability in the event you can’t pay your creditors, and the tax advantages of a private limited company.
We’re going to concentrate here on just the main tax advantages of a private limited company:
Is there a catch? Possibly:
How we can help you
We can calculate how much you could save by trading as a company. We offer a free incorporation service to our clients to help them benefit from the advantages of a private limited company. Our accounts and tax fees for companies start at just £50pcm. Use the buttons below for more details.
The 2013 Budget announcements included a brief outline of how the law will be changed to tax a shareholders/directors loan taken out of owner-managed companies by the shareholders/directors (herein directors). We have now seen the draft legislation so we can give you further details of how the tax law will apply for a directors loan or repayments made on and after 20 March 2013.
Where a director borrows from his company and repays the loan within nine months of the end of the accounting year in which the loan was taken, there is no tax charge for the company.
However, where the directors loan is outstanding for longer, the company must pay 25% of the loan balance as corporation tax to HMRC. This corporation tax charge is then repaid when the loan is fully repaid.
Four changes may affect when or if this corporation tax is payable:
1. Thirty day rule
Where a directors loan of £5,000 or more is repaid to the company, but within 30 days amounts totalling £5,000 or more are borrowed by the same borrower or one of his associates, the first loan is treated as not having been repaid and is treated as continuing for the purposes of calculating the corporation tax charge.
2. Intention or arrangements in place
Where the directors loan is £15,000 or more, the thirty day rule is ignored if at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so. If those later loans are made they are treated as a continuation of the first loan.
3. Using a third party
Loans channelled from the company through LLPs or partnerships in which the director is a member are treated as if the loan was made directly to the director. This also applies if the loan is advanced to a trust of which a director in the company is a beneficiary, or potential beneficiary.
4. Conferring a benefit
This is intended for the situation where an arrangement, perhaps a partnership structure between the company and a director is used to transfer value from the company to the director. It is unclear how this will work in practice, but any partnerships involving a company and one of more individuals will have to be reviewed.