Tax treatment for limited companies plays a significant role in financial planning and compliance. Additionally, understanding the tax rules can help businesses optimise their finances while meeting their obligations. Basically, limited companies have unique responsibilities and opportunities compared to other business structures.

Corporation Tax and Rates

Firstly, limited companies are subject to corporation tax on their profits. Unlike sole traders, who pay income tax, this tax applies directly to the company's earnings. Currently, the corporation tax rate depends on the company’s profit level, albeit rates may vary due to legislative changes. Consequently, staying updated on tax rates is essential for accurate planning.

Allowable Expenses

Another important aspect is claiming allowable expenses, which reduces taxable profits. For example, expenses like salaries, office costs, and professional fees can be deducted. However, only costs that are wholly and exclusively for business purposes qualify. Notwithstanding this, failure to correctly classify expenses could lead to complications.

Dividends and Personal Tax

Limited companies can distribute profits as dividends to shareholders. Evidently, dividends are taxed differently from salaries, with varying rates depending on income thresholds. Moreover, this method of payment can provide tax efficiency when combined with a director’s salary.

VAT Obligations

When turnover exceeds the VAT threshold, companies must register for VAT. Furthermore, businesses may reclaim VAT on allowable purchases. Equally, choosing the right VAT scheme is crucial for effective cash flow management.

Importance of Professional Advice

Lastly, professional guidance ensures compliance and identifies opportunities for tax relief. Despite the complexity of tax rules, working with advisors helps companies navigate the landscape successfully.

Tax treatment for limited companies is undeniably vital for financial health and growth. Therefore, tune in to the I Hate Numbers podcast for deeper insights into managing taxes and boosting your business. Additionally, explore how tools like Xero and our resource guide can simplify your financial journey.

Tax is an inevitable consideration when people are choosing which business structure to adopt. In the main, the business structures tend to gravitate between a sole trader or a limited company. In last week's podcast episode for I Hate Numbers, I looked at the overview of the tax treatment for sole traders.

This week, I'm going to have a look at limited companies. Now, if you do run a limited company or you're thinking of starting one, having an awareness of how the tax system works on both the company and you, is an important part of your business toolkit. I'll do my best to put things into straightforward non-jargony terms.

I'll throw in some examples. Let's crack on.

Worthwhile understanding what a limited company actually is. Now, a limited company is a separate legal entity from its owners. That means the company is responsible for its own finances, debt, and taxes. One thing we've also got to bear in mind, when we come into the context of a limited company, I would actually subdivide that into two categories.

Category one, is a limited company that's formed with what are called shares. So you become the shareholder and investor. And the other type of company is one that doesn't have share capital. Instead, it might be what's called limited by guarantee. And it's important to understand that distinction, because some of the things we're going to mention like dividends,

do not apply to companies that are limited by guarantee. I'm going to deal with this topic in more detail in a subsequent podcast, but for now, when I make references to dividends and shareholders, remember that only applies for companies that are limited with shares. Now, either way, irrespective of the type of company we're talking about, the individual who effectively runs the company, who effectively owns the company, is going to be called a shareholder, for shares and if you're the person who actually makes those day-to-day decisions and operates and runs the company you're going to be classified as a director. Now, the income that accrues to you from the company that has paid out you, that is part of your personal finances and is dealt with separately from the company's tax affairs.

Now, let's assume Edwin. Edwin decides to set up Edwin's Creative Studio Ltd. The company earns income by selling its services. It's got obligations to pay out expenses such as software costs, consulting fees, and you're going to pay tax on the business profits it generates. Now, Edwin obviously needs to live, he needs to survive, so he decides to take out a salary from the company.

Typically you would have to register with HMRC to set up a payroll scheme, and if it's a shareholding company he'll be taking out also some of that income in the form of dividends. I'd also throw in the option of benefits as well, but again a topic for another day. Let's just assume for now it's a salary and dividends. Now, look at the tax the company itself pays.

Now for Edwin's Creative Studio Ltd, there will be two taxes it's going to be exposed to. Number one, there's the Corporation Tax. And Corporation Tax is payable on all the profits the company makes. This will be its primary tax. Now, in addition, the company may also be liable to something called Employers National Insurance Contributions, NMICs for short.

Now, if the company does take on staff, has employees, including the director, then it may be liable to pay National Insurance Contributions as an employer. Now, currently, whether it pays National Insurance depends on a number of variables like the level of salary that's been paid out, but let's address that later on in the podcast.

Now let's look at the Corporation Tax situation. Now Corporation Tax is charged on the company's profits. Essentially, you look at the income that you've generated, the turnover if you wish, what you've sold, the services you're providing, the products you're selling. You take off all the allowable expenses, so if there's any advertising costs, rent paid out for storage, rent paid out for any facilities, payment of freelancers, payment of the accountant's fee, let's not forget that one, payment of Edwin's own salary and the salary of his staff.

Whatever's left over, typically, is the profits. If Edwin also has bought any equipment, then also he'd be able to claim the cost of that equipment as well. There are currently, there are three headline rates for Corporation Tax in the United Kingdom. Now these rates are based on Edwin only having one company, and the rates are as follows.

Now for the year 24/25, so that's from the 1st of April 24 onwards, is 25%. If that company's profits are over 250,000 pounds, if the profits for that company are below 50, then you pay 19%. But if you've got profits in between those two figures, then you will pay 25% on the profits and then you deduct something that tax people call a marginal rate.

As a heads up, the closer your profits are to 50, the bigger the relief will be. The closer your profits are to 250, the smaller the relief will be. Now, let's phone some numbers. The Edwin's Creative Studio earns 120,000 pounds by way of turnover for the services it provides, the products themselves. It also has 40,000 pounds that’s spent on expenses, so that's office rent, marketing costs, freelancer costs and the like.

And that means Edwin's profit for the year is 80,000 pounds. Now Edwin, profits of 50 falls between that magic number of 50, 000 and 250, 000. So Edwin in corporation tax terms will pay 25% on that figure and then deduct an interesting calculation, what's called marginal relief. I mentioned earlier on about salaries and National Insurance.

Now if your limited company has employees and that includes yourself as a director taking out a salary, that it needs to handle something called PAYE. PAYE, by the way, folks, as a bit of historical background, was introduced in 1944. The employer, in this capacity, once they're registered, operates as an unpaid tax collector.

The operation of the system is down to the employer, with the usual obligations and responsibilities placed on them. Now, Edwin decides that his salary will be the magic figure of 12,570. That's his salary. And that salary, by the way, will be treated as tax free, because that's equivalent to Edwin's personal allowance.

If Edwin actually had a salary greater than that, and there could be a number of good reasons for going beyond that, then the company will pay employers national insurance contributions on the excess over 12,570. Now, rates change all the time. Currently, in the year that we're talking about, 24/25, the limit is 9,100.

Anything over that, you're paying National Insurance at 13.8. But there's also a change from the 1st of April 2025, when it becomes 15 percent over 5,000. Now, there is a compensation, by the way, of what's called Employer's Allowance, but let's not get too complex and bogged down. We'll be dealing with that in a subsequent podcast.

And there's a link, by the way, for a video on the Budget 24 overview. I digress. Now on that 20,000-pound salary, the company currently will have to pay 1,500 pounds. If Edwin is the only director, no other employees, then there's no relief from that 1,500 pounds. Now I mentioned dividends earlier on, and remember this only applies to companies that have got shareholders.

If you don't have shareholders, if you're an arts organisation, a not-for-profit organisation, a CIC perhaps, that hasn't got share capital, dividends do not apply to you. Now, if you've got a private company that's got shares and you extract money beyond your salary, that would normally be classified as dividends.

Now, dividends are taken out of, legally and commercially, out of companies after tax profits. They're not considered to be tax-deductible costs. They're not business costs. That's just giving up the profit the company has made and giving it to the owners. It doesn't attract national insurance, but it attracts tax, nevertheless

in the individual's tax return. So for example, if we take Sarah, she's got 60,000 of profit, let's say for argument's sake, that's 60,000 after paying tax, 20,000 of that, she decides to withdraw as dividends and the rates will go as follows. Now, remember this is now personal tax for Sarah, so she will be doing a personal tax return and including on her personal tax return the dividends she's taken out as well as the salary and anything else there might be.

Now for the dividends, the way it works, the first 1,000 pounds for 24/25 is free. Thank you very much HMRC. Anything over that, as long as Edwin remains a basic rate taxpayer, he'll be paying 8.75 percent on those dividends. And anything over that, if Edwin becomes a higher rate taxpayer, because of the income he's got in that year, then he'll pay 33.75 percent.

A big jump up there. So, let's say for argument's sake Edwin in our fictional example has no other income, and for personal tax has 12,570 salary, 20,000 dividends, the total income for Edwin is 32,570. The first grand of the dividends is tax free, the remaining 19 percent of those dividends are him still as a basic rate taxpayer, and he'll pay 8.75 percent.

That's about 1660 odd quid. Now the dates, the numbers can be quite confusing. Again, if you haven't got an accountant to help you with this, it's probably an idea to do so. Now, the last couple of things I want to look at is the filing and the deadlines. So let's go back to our company. Companies are separate legal entities.

They have their own obligations, their own responsibilities. And in any system of tax or compliance, if you don't follow the rules, there will be a financial consequence. If you really are going to be really naughty, there could be also a much harsher punitive outcome as well. Now, here's the key deadlines.

When it comes to the document, the Corporation Tax return, CT600, if you want the official word, they're matched due 12 months after the end of your company's financial year. The annual accounts need to get to the company's house, the regulator, within nine months of the end of your financial year. The PAYE, the National Insurance Contributions, you can elect to pay them quarterly or monthly.

And peculiarly, by the way, the tax that you pay, the Corporation Tax, also has to be paid within nine months of the end of your financial year. So perversely, you pay the tax and you could submit the tax return three months later. My advice would be, submit them at the same time. And that's what we do for our clients.

So let's give some illustration here. Edward's financial year ends on the 31st of March 24. He has got to file the company accounts by the 31st of December 2024. Remember that's the accounts for the company, not his personal return. The tax has got to be paid also by 31st of December 2024. And the actual Corporation Tax return, technically speaking, he's got until the 31st of March 2025.

And when it comes to record keeping, record keeping is important, whether it's personal tax or Corporate Tax, but it's vital for limited companies. As a director, you have a responsibility for the company, even though it might be yours. There is a legal obligation placed on your shoulders. You need clear records, not only to track your income and your expenses, not only for compliance to help you complete the returns and the documentation, but also to give you good insight as well.

And also a possibility, HMRC may decide to have a look at those records and you as the taxpayer and the director of the company have a responsibility to make sure those records are kept adequately. My own personal preference would be that people go into digital. Cough, cough, Xero is a good tool to use.

There are other tools out there in the marketplace, but make sure you've got good record-keeping systems. So folks, I hope you found this useful. Hope that's given you an understanding here. In future episodes, we're going to be diving deeper, but it's good to have an overview about how the system works for companies.

Until next time, happy taxation. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week, for another I Hate Numbers episode.