Understanding your tax obligations as a limited company director

The different taxes that all company directors need to be aware of

There are many taxes you might need to pay as a company director. Understanding them can be hard. 

But it’s crucial to stay updated on your tax duties. For instance, not registering for VAT or missing tax payments as an employer can lead to action from HM Revenue and Customs against you and your company.

In a constantly changing environment, staying updated on current and upcoming laws as a director is vital for your company’s success. Here, we explore five common types of tax that you should know about as a company director.

1. Income Tax

As a director of a limited company, you might need to pay income tax on the dividends and salary you draw from the business. The current personal allowance is £12,500 (2019-20). Income exceeding this threshold is subject to taxation under the Pay As You Earn (PAYE) scheme, deducted at source by your company’s payroll system.

Starting from 1st April 2018, individuals have a tax-free dividend allowance of £2,000 alongside the previously mentioned personal allowance.

Dividends exceeding £2,000 will be taxed based on your taxpayer status:

Basic rate taxpayer 7.5%
Higher rate taxpayer 32.5%
Additional rate taxpayer 38.1%

2. Corporation Tax 

Corporation tax is applied to your company’s taxable profits and is presently set at a rate of 19%. It’s crucial to register for this tax when your company is established. Unlike individuals, limited companies don’t have a personal allowance, so this tax is applied to all profits.

Corporation tax is payable nine months and one day after your accounting year ends. You must complete a CT600, the annual corporation tax return, by the deadline. Failing to do so incurs penalty fines.

Taxable profits typically encompass profits generated from regular trading activities, most investments, and gains from asset sales. You might qualify to claim reliefs and capital allowances, which can help lower your corporation tax liability.

3. VAT

Starting from 1st April 2018, the threshold for VAT registration is £85,000. This threshold will remain unchanged for the next two years. 

If your turnover surpasses this amount within any rolling 12-month period, you must notify HMRC. Failure to register for VAT, non-payment of the tax, or late payments will result in financial penalties.

Once registered, you can alternate VAT on your goods and services while also reclaiming it on eligible products your company buys. VAT functions as an indirect business tax since the customer has already paid the amount; you’re merely collecting it on behalf of HMRC.

The standard rate of VAT is presently 20%, yet schemes exist to simplify the collection and reporting process for eligible companies. For instance:

#Cash accounting: 

Cash accounting aids eligible companies in managing their cash flow since VAT is only paid once the business receives the money. This differs from the usual method of paying VAT even if invoices remain outstanding for that period.

#Flat rate scheme: 

A flat rate scheme simplifies the calculation process by paying a fixed rate of VAT, making administration easier.

Note: [The cash accounting and flat rate schemes cannot be used simultaneously]

4. National Insurance

If your salary from the company is £8,632 or higher, you will owe Class 1 National Insurance contributions as an employee. 

Additionally, the company must pay Class 1 employer’s contributions to HMRC. Contributions are determined by your annual salary, but payments to HMRC must be made according to your regular payroll schedule, whether that’s monthly or weekly.

The Employment Allowance enables you to reclaim up to £3,000 of employers’ Class 1 National Insurance contributions per tax year if you’re a director who employs other staff.

5. Business Rates

While not strictly a tax, business rates resemble the council tax paid for residential properties. If you operate from commercial premises, you’ll likely need to pay business rates. The revenue from business rates contributes to funding national services, such as education and social care.

The amount you pay is determined by the ‘rateable value’ of your premises, which is its open market rental value. This value is multiplied by the appropriate government-set multiplier. 

The multiplier is reviewed annually, with a separate (and lower) multiplier for businesses with a rateable value below £51,000.

When you receive your business rates bill, the calculation will have already been completed, and you will be informed of the amount you owe. Usually, payment of business rates is spread across 10 equal monthly installments throughout the year. However, if you fall behind in the payment schedule, you may be required to pay the remaining balance in one lump sum.

Rateable values are typically reassessed every few years, and there are several reliefs accessible to assist eligible businesses. Certain premises, such as farm buildings used exclusively for agriculture and places of worship, are automatically exempt from business rate liability. Additionally, various relief schemes exist based on the size and nature of your business.

Home-based companies may not always be subject to business rates. However, this depends on factors such as whether you employ staff to work from your home. In some cases, you may be required to pay business rates only on the portion of your home used for business, while paying council tax on the rest of the property.

Vanguard Insolvency can help you meet all your tax obligations as a company director and steer clear of the substantial penalties imposed by HMRC for late or non-payment. 

Contact our team to schedule a meeting at any of our offices.

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David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.