Limited companies have different tax responsibilities than sole traders and partnership structures. In the UK, they pay between 19% and 25% Corporation Tax on their business profits. Depending on their circumstances, some companies also have to pay VAT and employer’s National Insurance contributions (NIC).
This post explains how and when companies pay these different taxes. We also briefly explain the personal tax you need to pay as a director and shareholder of a UK limited company. This will give you a better understanding of the overall tax liability associated with running your business as a company.
Corporation Tax
The main tax that limited companies pay is Corporation Tax. It applies to all taxable profit that a company makes from its trading activities (e.g. buying and selling goods or services), investments, and the sale of business assets for more than they originally cost.
‘Taxable profit’ is the income that your company earns, less all allowable business expenses, such as stock, rent and utilities, and wages.
Depending on how much money your company makes in a year, you will pay between 19% and 25% Corporation Tax on taxable business profits.
From 1 April 2023 onward, the following rates of Corporation Tax apply:
- 19% ‘small profits rate’ – you pay this rate if your company makes an annual profit of less than £50,000
- 25% ‘main rate’ – you pay this rate if your company makes an annual profit of more than £250,000
If your company’s taxable business profits for the year are between £50,000 and £250,000, you can claim Marginal Relief. This relief provides a gradual increase in the rate of Corporation Tax you pay between the small profits rate (19%) and the main rate (25%).
Essentially, the amount of Corporation Tax your company pays increases proportionally to the level of profit it generates from £50,000 up to £250,000. However, Marginal Relief is not available if your company profits exceed £250,000. In such instances, you will pay 25% Corporation Tax on all profits.
Example 1 – small profits rate
Your company has annual taxable profits of £50,000. You will pay 19% Corporation Tax (the small profits rate) on the full amount. Your Corporation Tax bill will be £9,500.
Example 2 – Marginal Relief
Your company has annual taxable profits of £150,000. You will be eligible for Marginal Relief, so you’ll pay an effective rate of 24% Corporation Tax on all profits. Your Corporation Tax bill will be £36,000.
This tax liability is worked out as follows:
- Corporation Tax before Marginal Relief: 25% of £150,000 = £37,500
- HMRC’s Marginal Relief calculation: (3/2000) x (£250,000 – £150,000) = £1,500
- Corporation Tax due = £36,000 (£37,500 less £1,500 Marginal Relief)
HMRC provides an online Marginal Relief calculator that you can use to check how much relief you may be able to claim on your Corporation Tax profits from 1 April 2023. This facility will give you an idea of your effective Corporation Tax rates before and after Marginal Relief, and the total amount of tax your company will pay.
Example 3 – main rate
Your company has annual taxable profits of £251,000. You will pay 25% Corporation Tax (the main rate) on the full amount. Your Corporation Tax bill will be £62,750.
Corporation Tax registration requirements
Limited companies must register for Corporation Tax with HMRC no later than three months after starting to do business (e.g. trading). You can complete this registration online.
Every year, you will need to prepare a Company Tax Return (including full annual accounts) to work out and report how much Corporation Tax you owe on your business profits.
The deadline for filing the tax return is 12 months after the end of your company’s Corporation Tax accounting period. The deadline for paying your Corporation Tax bill is 9 months and 1 day after the end of this accounting period.
You will notice from these two deadlines that you need to pay your Corporation Tax bill before you file the corresponding Company Tax Return with HMRC.
Value Added Tax (VAT)
Value Added Tax (VAT) differs from Corporation Tax. This is a tax that is charged on most goods and services, so your company will pay VAT on a lot of things that it buys and uses (e.g. stock, equipment and machinery, gas and electric, internet, etc), regardless of whether it’s a VAT-registered business.
VAT registration is compulsory if:
- your company’s total VAT-taxable turnover for the last 12 months is more than £90,000 (the VAT-registration threshold from 1 April 2024)
- you expect your company’s turnover to exceed £90,000 in the next 30 days
VAT registration is also compulsory (regardless of VAT-taxable turnover) if your company is based outside of the UK and supplies any goods or services to the UK (or you expect to do so in the next 30 days).
If your company’s VAT-taxable turnover is below the threshold, you can choose to voluntarily register for VAT. By doing so, your business can charge VAT to customers and reclaim the VAT it pays on the goods or services it buys.
There are different rates of VAT, depending on what you buy and sell. The standard rate of VAT in the UK is currently 20%. This applies to most goods and services. Certain goods and services attract a reduced rate of 5%, whilst others are set at zero rate (0%).
Even if your company is very small, it’s worthwhile checking if voluntary VAT registration could save you money and be of benefit to your business.
VAT registration requirements
Most businesses can register for VAT online. If registration is compulsory, the deadline for doing so depends on when you exceeded, or expect to exceed, the £90,000 annual VAT-taxable threshold:
- If your company’s turnover exceeded the threshold in the last 12 months, you must register within 30 days of the end of the month in which you exceeded the threshold
- If your company’s turnover is going to exceed the registration threshold in the next 30 days, you must register by the end of that 30-day period
Once you have registered, you will be required to submit a VAT Return to HMRC at the end of each VAT accounting period, which is usually every three months. The filing deadline is 1 month and 7 days after the end of the VAT accounting period. You will normally pay your VAT bill at the same time.
Employers’ National Insurance contributions
Your company will have to pay employers’ Class 1 (secondary) National Insurance contributions (NIC) on the wages of any employee (or director) who earns above the NIC Secondary Threshold.
For the 2024/25 tax year, the rate of employers’ NIC is 13.8%, and the Secondary Threshold is £9,100 a year (£175 a week, £758 a month).
For example, if you were to pay an employee or director £25,000 a year, your company would have to pay employers NIC of £2,194 (13.8% of the portion of wages between £9,100 and £25,000).
As an employer, you also have to pay 13.8% Class 1A or Class 1B NIC on any taxable benefits or expenses you provide to employees or directors.
You pay employers’ National Insurance contributions to HMRC through PAYE (Pay As You Earn). To do so, you need to register your company as an employer, enrol for PAYE Online, and operate it as part of your payroll.
However, like wages and salaries, your company’s NIC liability is a tax-deductible business expense. This means that you can deduct the cost from your profits to reduce your Corporation Tax bill.
Personal tax for company directors and shareholders
If you are a director and shareholder of a UK limited company, you may also have to pay tax on the money you receive from the business. This includes Income Tax and National Insurance on your directors’ salary, as well as dividend tax on any dividends you receive as a shareholder.
Whilst these are personal taxes, rather than business taxes payable by your company, it is worthwhile having the full picture of all tax liabilities you’ll face when running a business as a limited company.
Income Tax and National Insurance on your director’s salary
The amount of Income Tax and National Insurance contributions you’ll pay on your director’s salary depends on how much you choose to pay yourself.
Income Tax rates and thresholds (England, Wales, and Northern Ireland) for 2024/25 are as follows:
- 0% – the Personal Allowance – on earnings up to £12,570
- 20% – the basic rate – on earnings between £12,571 and £50,270
- 40% – the higher rate – on earnings between £50,271 and £125,140
- 45% – the additional rate – on earnings over £125,140
Scottish Income Tax rates and thresholds for 2024/25 are as follows:
- 0% – the Personal Allowance – on earnings up to £12,570
- 19% – the starter rate – on earnings between £12,571 and £14,876
- 20% – the basic rate – on earnings between £14,877 and £26,561
- 21% – the intermediate rate – on earnings between £26,562 and £43,662
- 42% – the higher rate – on earnings between £43,663 and £75,000
- 45% – the advanced rate – on earnings between £75,001 and £125,140
- 48% – the additional rate – on earnings over £125,140
You will also be liable to 8% Class 1 employee National Insurance contributions on any salary income above the NIC Primary Threshold. This is currently £12,570 for 2024/25 – the same as the Personal Allowance threshold.
Therefore, if you take a director’s salary up to £12,570, you won’t pay any Income Tax or employee NIC on it because it’s within your annual Personal Allowance and the Primary Threshold.
Tax on dividends
You won’t pay Income Tax or NIC on any dividend income you receive as a shareholder. Dividend income is taxed at the following rates (including if you live in Scotland), depending on the tax band you fall into when your total annual income from all sources is taken into account:
- 8.75% – basic rate – if your total annual income is no more than £50,270
- 33.75% – higher rate – if your total annual income is between £50,271 and £125,140
- 39.35% – additional rate – if your total annual income is more than £125,140
Regardless of your tax band, you will receive a tax-free dividend allowance of £500 (2024/25 tax year). This means that you won’t have to pay dividend tax on the first £500 of dividend income you receive from your company.
It is common in many limited companies for the directors to also be shareholders. If this is the case for you, the most tax-efficient way to pay yourself is to take a director’s salary up to the NIC Primary Threshold and then take the rest of your income as dividends.
Dividends are not tax-deductible business expenses like salaries and wages. They are paid from profit after Corporation Tax. Nevertheless, the total tax that you and your company will pay on this income will be less than if you were to take all of your personal income as a director’s salary.
To ensure that you don’t end up paying more business and personal tax than you need to, we would recommend seeking guidance from a reputable accountant or tax advisor.
Thanks for reading
The tax liabilities and responsibilities of limited companies are more complex than other types of business structures. However, there is generally a greater opportunity for tax efficiency, particularly if you have an accountant who can assist you with your tax affairs.
We hope that this post has helped you to understand how much tax you pay when running your business as a limited company.
If you have any questions about this topic or would like to speak to us about setting up and running a company in the UK, please comment below or get in touch with our company formation team.
