The tax rules for limited companies are slightly different to other company structures. We take a look at what constitutes a limited company, the types of tax they must pay, and how much the current rates are.
What is a limited company?
A limited company is a business that has registered with Companies House as a legal ‘person’. The business is detached from the owners and is responsible for its own actions, finances and liabilities.
The company owners are protected by ‘limited liability’, which means they are only responsible for business debts up to the value of their investments. The same person can be both the owner and the director.
‘Limited by shares’
These tend to be ‘for profit’ businesses which have shares and shareholders. The company can keep all profits made after tax.
‘Limited by guarantee’
These tend to be ‘not for profit’ businesses with guarantors. The profits made are invested back into the company.
How much corporation tax does a limited company pay?
The current rate of Corporation Tax for limited companies is 19% and you pay that on your total profits (minus allowable business expenses). Limited companies do not have to pay income tax or national insurance.
Therefore, the amount of tax a limited company pays will depend on their profit in the tax year. If your limited company earns £120,000 in 2018/2019 and your expenses total £20,000, your profit will be £100,000. The amount of corporation tax your limited company must pay will therefore be £19,000.
The 19% rate of corporation tax is set for 2019/2020 but for the tax year beginning April 2020, this will decrease to 18%. You can keep an eye on the GOV.UK Corporation Tax page to see updated rates.
How does tax on dividends work for limited companies?
If your limited company has made a profit after taking away business expenses and corporation tax, it can distribute these earnings to its shareholders with something called a ‘dividend’. You can only pay shareholders a dividend if you have sufficient profits to cover it.
Your limited company does not need to pay tax on dividends in the UK but the shareholders who receive them may have to pay income tax and national insurance based on their personal tax allowance. This will become apparent when they complete their annual self-assessment.
The tax rates for limited companies can change on a yearly basis and it can be difficult to determine exactly what your tax liabilities are. It’s a good idea to have tax accounting software to help you clearly understand your obligations and manage your compliance.
If you want to discuss your limited company tax obligations with our team, you’re welcome to get in touch and see how we can help you.