If you run your own business or you’re thinking of starting one, you may have opted to turn it into a limited company (otherwise known as “incorporating” it). But do you know exactly what this means when it comes to the taxes that your business is subject to?
Emily Coltman FCA, Chief Accountant to FreeAgent - who provide a multi award-winning online accounting system specifically-designed for freelancers and small businesses - suggests six things that people who run limited companies need to remember about their tax liabilities.
You are an employee of your limited company - and the company is your employer
It’s crucial to remember that your limited company is a separate legal entity from you - even if you’re the company’s only director and you also own all the shares in the company. This means that any money the company earns from its customers belongs to the company, rather than to you personally. As a result, you have to be careful how much money you take out of the company, as taking out too much can increase tax bills.
If you’re going to take anything out of the company at all - either by way of a salary or if the company pays you back for expenses you’ve incurred personally on its behalf - then you must register the company with HMRC as an employer.
You can’t just take money out of your limited company
Because the company’s money doesn’t all belong to you, you can’t simply withdraw cash from the company bank account like sole traders can from their business accounts, without risking paying excess tax.
There are three ways the company can pay you money:
- It can pay you a salary as a director.
- It can pay you dividends on the shares you hold in the company (assuming it has enough profit available after corporation tax to pay those dividends).
- It can pay you back for money you’ve lent it, or that you’ve spent personally on company costs, or costs that you’ve incurred for the company but without spending any physical cash - like mileage travelled on business in your own car.
If you take money out of the company over and above these amounts, you may have to pay extra tax. However, if you get the mix of salary and dividends right, then you could potentially reduce your tax bill compared to if you kept your business as a sole trader, because there’s no National Insurance to pay on dividend income (although you should speak to your accountant about this because it may vary depending on any other income you have).
Be careful when the company pays on your behalf
If the company pays for personal costs on your behalf, for example if it provides you with private health insurance, or pays for your children’s school fees, then this will almost certainly be considered a taxable benefit by HRMC. That means that in some cases, you may need to add the value to your salary and pay tax and/or National Insurance on it. Check out HMRC’s full guidance on taxable benefits for more details.
Make sure you’re not a quasi-employee of your clients
There may be some clients you work for, or projects you take on, where HMRC would actually consider you an employee of that client - this is covered by a piece of legislation usually called IR35.
Basically this means that if you are considered to be an employee of your client in all but name, your company will have to pay extra money to HMRC. If you’re caught by IR35, then your company will have to make a “deemed payment” to HMRC to compensate for this National Insurance. If you were a sole trader, however, and found to be a quasi-employee, then it would be your client who would have to make an additional payment.
HMRC look at the whole picture and what actually happens when they’re trying to determine whether a contractor is an employee in all but name, rather than simply reading the contract between you and your client. So make sure you consider the rules of IR35 carefully to ensure you’re not a quasi-employee!
Check your expenses
When it comes to out-of-pocket expenses (such as your business use of home, travel & accommodation or entertaining costs) the company can usually pay you back for these without anyone incurring extra tax. But you will need to make sure that you don’t include in the company’s accounts more than the actual costs you’ve incurred, otherwise the company will have to run these through your payroll and deduct PAYE and NI from the extra.
If you need more information about what expenses you can and can’t claim as a limited company director, check out our handy A-Z expenses guide for directors of limited companies.
Know what tax you have to pay
Limited companies have to pay corporation tax on profits for each year they trade, which must be paid to HMRC within 9 months and a day after the year-end. So if your company prepares accounts to 31st March each year, any corporation tax will be due by 1st January the following year.
The company also has to file a corporation tax return, or CT600, to HMRC each year, which shows how its tax was worked out. The CT600 isn’t due until 12 months after the year-end, but in practice, because the company must pay corporation tax 3 months before this, most companies don’t file so long after their year end.
A limited company must also file accounts and a form called an annual return which lists the company’s directors, shareholders and company address - as well as what it actually does - each year with Companies House. The accounts are due 9 months after the year-end, and Companies House impose penalties for late filing of accounts. The annual return is due each year on the anniversary of the company’s incorporation.