How to run a limited company
Running 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.
What is a limited company?
Registered at Companies House
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.
A separate entity
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.
What must a company do?
Open a bank account
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.
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.
Register for tax
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.
Comply with laws and regulations
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.
How to take money from a company?
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.
Tax on directors loan accounts
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.
How much tax will I pay?
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.
Do I still need to submit a personal tax return?
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:
- HMRC request a tax return. You can call HMRC to try to cancel their request if you think you don’t have anything to pay tax on. Otherwise, you will have to do one.
- You haven’t paid tax on taxable income. For example dividends or interest above the tax-free allowances.
- Your total income is over £100,000.
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.
Ready to run a limited company?
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 Quote