Table of contents
Table of contents
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My main focus is managing the blog and product content for the Protectivity website ensuring everything aligns wi...
My main focus is managing the blog and product content for the Protectivity website ensuring everything aligns with the brand’s voice and strategy.
For the small businesses we support, insurance and financial protection can sometimes seem complicated, especially when getting started. That’s why our content is designed to be clear and practical—providing helpful guidance and ensuring our customers not only find the specialist cover they require but are confident it will do the job they need.
Starting a small business can be extremely exciting and rewarding. If there’s something you’re passionate about, you’ve spotted a gap in a market, or you just want to be your own boss, then there are plenty of opportunities out there for you to become an entrepreneur. And perhaps the best part about it is that there’s no limit to how successful your business can be and how much money you can make… except one.
Tax isn’t exactly the most fun part of doing business but it is an unavoidable fact of life. As a small business owner, you’ll be required to pay tax not only personally, but also for the limited company you operate. Unfortunately, this can be a fiendishly complicated subject to deal with, as there are many different taxes, thresholds, rates and deadlines to comply with.
This guide makes all the basic ins and outs of limited company tax digestible and easy to understand. If you’re starting a small business, or thinking about doing so, then it’s essential that you understand the key facts around tax – even if you intend to recruit a qualified professional to take care of your tax affairs on your behalf. We’ll cover all the main kinds of tax both you and your company will have to pay, how to (legally) reduce your tax bills, how to get help with tax, and the other key considerations to make as you begin your business adventure.
What types of tax does a limited company pay?
There are five main kinds of tax to watch out for if you’re running a limited company. Some of them may not apply to your business, and you may be able to apply for reliefs and exemptions for others. However, you should keep abreast of all of them, as the thresholds and requirements are liable to change on a regular basis (especially in the Government’s annual Budget, usually announced in March).
Corporation tax
So, how much is corporation tax for a limited company? Well, there’s no fixed answer to that question, as it depends on a number of things.
As and when your company makes a profit, you will be required to pay a certain proportion of it as corporation tax. Your profit is defined as your takings for the year, minus any wages and dividends you pay out, any pension contributions, any expenses (more on that below) and any allowances or reliefs that you may be entitled to.
The rates that apply depends on how much profit you make within your accounting year. Your first £50,000 of profit for the year is taxed at 19%. After this, a tax rate of 26.5% is applied to all profits up to the £250,000 mark, then 25% after that. This is so that larger companies pay tax at a higher rate overall, because it means that all companies that make more than £250,000 profit in a year pay a total rate of 25%.
Employer’s National Insurance contributions
If you employ any staff within your limited company (even just one) then you will be required to make National Insurance contributions, on top of those that employees make themselves out of their wages. These contributions also have to be paid on any employee benefits and expenses that employees claim. The rate is generally 15.05%, although people including the low-waged may be exempt.
Business rates and small-business rates relief
The simplest way to describe business rates is that it is the business version of council tax. It applies to any properties within your company that are primarily used for business purposes; if you are a one-person business working from a computer at home, then business rates generally don’t apply.
While the costs of business rates to your local council can be substantial, there are several reliefs available to small businesses that can lower the size of bills, or sometimes wipe them out altogether. These include (and are not necessarily limited to): farm buildings, religious buildings, properties used for the disabled, and businesses with a low rateable value. Retail properties can also apply for 100% business rate relief for three months.
VAT
If your business turns over more than £85,000 in any 12-month period, you are legally obliged to register for Value Added Tax (VAT). If your turnover is below the threshold, you can also voluntarily register for VAT as it can sometimes be advantageous to do so. The current VAT rate is 20%, and you’ll be required to charge it on top of your normal fees for any goods or services you sell, and pay it for any that you buy.
The amount of VAT that you have to remit to His Majesty’s Revenue and Customs (HMRC) is whatever you’ve taken in VAT from other businesses from your sales, minus any VAT you’ve paid out in goods and services you’ve bought. So, for example, if you’ve collected £10,000 in VAT within a three-month period, and you’ve paid out £3,000, then you owe £7,000 to HMRC.
The good news is that the system works both ways: if you have paid out more in VAT than you’ve taken in, then you can apply to reclaim VAT from HMRC and they will refund you the difference. As the example here, if you’ve paid out £5,000 in VAT, but only taken £1,500 in, then HMRC should pay you £3,500.
Capital gains tax
If you are a limited company, then capital gains tax (paid on any profits you make by selling assets) doesn’t apply in the same way it would to a sole trader or a partnership. However, you are required to pay corporation tax on the profit instead: the money you make will count as part of your overall CT profit and therefore taxed at the applicable rate (see above).
What kind of personal tax would I have to pay as a limited company owner?
As the owner and director of a company, you will naturally want to take some (or all!) of the fruits of your labours as your earnings. There are a number of different ways to do this that are open to you, and which will be better will depend on the state of your business and your own personal circumstances. But in general, there are two main taxes that will apply to you personally:
Income tax for employees
Much as you would if you worked for another business, any wages you take are taxed according to normal income tax rates.
As of the 2023/24 tax year, the first £12,570 you earn each year are exempt from any income tax, but all your earnings beyond this up to £50,270 will be taxed at 20%. Earnings beyond this are taxed at 40%, and if you’re doing well enough to be earning more than £125,140 a year, then the highest rate of 45% applies. Please note that slightly different thresholds apply in Scotland.
You’ll also have to make National Insurance contributions in the same way as a ‘normal’ employee. This is in addition to the Employer’s National Insurance contributions mentioned above.
Dividend tax
You can pay dividends out of your company to yourself whenever you want, but this will be subject to dividend tax. As of the 2023/24 tax year, the tax-free dividend allowance is £1000, and this is expected to be cut again to £500 in 2024/25. Beyond this, dividends are taxed at 8.75%, which still represents a tax-efficient way to pay yourself compared to regular income tax.
However, if your normal pay plus your dividends totals more than £50,270 a year (which would normally move you into the higher rate of income tax), then you’ll have to pay 33.75% dividend tax on all your dividends above this threshold.
When should limited company taxes be paid?
These requirements vary from one tax to another, depending on the time of year you started your business, how much you pay yourself and other employees, and whether certain taxes are applicable to you. As a general guide, the following timescales normally apply:
- Corporation tax: nine months after the end of your business year (i.e. if your business year runs from 1 January to 31 December 2023), then your Corporation Tax bill will be due around the end of September 2024
- VAT: this should be remitted to HMRC quarterly, no more than 37 days after the end of each designated three-month period. You are still expected to submit a VAT return every three months if registered, even if you don’t have any VAT to pay for that period
- Business rates: you will normally receive a business rates bill around February or March, detailing the monthly instalments you’ll be required to pay for the following financial year
- Employers’ NI: should be paid at the same time as you make each payment of wages to your employees (i.e. weekly or monthly)
- Income tax and dividend tax: this could be through Pay-As-You-Earn, an annual Self-Assessment with associated payments every six months, or a combination of the two
What should I do about tax when starting a limited company?
If you’re worried that the above is overly complicated and too much to keep track of, then don’t panic: you’re certainly not alone in that. Even the most experienced entrepreneurs and small business owners can find limited company tax requirements perplexing.
That’s why it’s always a good idea to hire the services of a good accountant when starting a limited company. They will be fully up to speed with everything mentioned in this guide, and any upcoming changes that may affect you. They will be able to organise your payslips and tax returns, and give you all the information you need about what you need to pay and when.
How can I legally reduce my limited company tax bill?
Tax evasion is illegal and never a good idea, even if your business is struggling. However, the complexity of tax regulations means that there are a number of legal ways that you can reduce the amount of tax your or your business has to pay. Using dividends instead of PAYE to pay some of your wages, as mentioned earlier in this guide, is an excellent example of this and common practice among small business owners around the country.
This is another area where having an accountant really comes into its own. They’ll have the expertise and experience to advise on areas where you can bring your tax bill down, such as business expenses you can claim that you may not have been previously aware of. While you’ll need to commit a certain amount of money to hire an accountant’s services, they can often save you many times you outlay in tax each year, making it a very worthwhile endeavour.
Get small business insurance with Protectivity
If you’re just starting out with a small business, there’s a lot to get your head around – and tax is just one of the complex challenges to navigate. Given the risks of starting a business, anything you can do to protect yourself and your enterprise from financial harm is worth doing, which is why good insurance cover is essential right from the start.
At Protectivity, we specialise in comprehensive insurance cover for countless small businesses just like yours. We offer hairdressers insurance and insurance for pet businesses and dog groomers. We can give you peace of mind that if the unforeseen happens, such as an injury or damage to property, you won’t be out of pocket. Our flexible, affordable policies start from just a few pounds a month, meaning you can safeguard your future without breaking the bank.
To find out more on our policies and how we can protect your business, get in touch with our team today.
Get Small Business Insurance from Protectivity
*Disclaimer – This blog has been created as general information and should not be taken as advice. Make sure you have the correct level of insurance for your requirements and always review policy documentation. Information is factually accurate at the time of publishing but may have become out of date.
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My main focus is managing the blog and product content for the Protectivity website ensuring everything aligns with the brand’s voice and strategy.
For the small businesses we support, insurance and financial protection can sometimes seem complicated, especially when getting started. That’s why our content is designed to be clear and practical—providing helpful guidance and ensuring our customers not only find the specialist cover they require but are confident it will do the job they need.
