When you’re an employee, paying your taxes is fairly straightforward. You pay via PAYE, and your income tax and Class 1 NICs are deducted at source. Your employer then pays Class 1 NICs of 13.8% on salary you earn above the secondary threshold.
This changes when you become self-employed. You’re now in charge of managing your taxes, which are paid through Self Assessment. You’ll need to pay income tax on your profits, as well as Class 2 and Class 4 NICs.
You may also need to pay VAT, depending on whether your turnover exceeds the VAT threshold, or if you decide to register for VAT voluntarily. And if you’re a Construction Industry Scheme (CIS) contractor, you’ll have to pay monthly CIS deductions to HMRC.
You’re taxed differently when you operate your own limited company. You pay income tax and Class 1 NICs on wages, and dividend tax on dividends you receive. Your company pays corporation tax, as well as Class 1 employer’s NICs on your wages. And if you’re registered for VAT or the CIS scheme, you’ll have to pay these taxes accordingly.
The tax implications of providing a company car can be complex-and made even more confusing by HMRC's tax changes.
To help you along, we've put together an article that will guide you through the essentials.
We'll start with the basics, explaining who pays for company car tax and how it is calculated, before we run you through a quick summary of tax rates changes that were announced in July 2019.
Our article will likely answer the key questions that you have surrounding company car tax, but bear in mind that it isn't a substitute for professional advice. If you have further questions about tax and how it affects your business, do reach out our accountants at Forma for personalised advice.
VAT is a type of consumption tax added to the cost of most goods and services for both B2C and B2B markets. There are three rates of VAT: standard rate (20%), reduced rate (5%) and zero rate (0%). VAT is not charged on exempt or out-of-scope items.
VAT registration becomes mandatory when you meet the conditions listed below:
But there are instances where you could benefit from VAT registration, even when it isn’t required.
It could lend credibility to your company, as being VAT-registered creates the impression that your business is larger and more established. Additionally, you may be able to reclaim VAT on goods and services you’ve purchased from other businesses.
However, these advantages must be weighed against the downsides.
Charging VAT on your goods or services could make them seem more expensive, and less appealing in a competitive business landscape. You’ll also need to handle the additional administrative burden that comes with being VAT-registered, and manage the risks of being faced with an unexpected VAT bill.
A unique taxpayer reference (UTR) number is a 10-digit code that’s issued by HMRC to you as an individual (personal UTR number), or to your business, partnership or organisation (company UTR number). Just like your National Insurance number, each UTR number is unique and will stay the same throughout your life.
A personal UTR number is assigned to an individual when he or she registers for Self Assessment, while a company UTR number is issued when a company is incorporated or a partnership is registered.
As a sole trader, you’ll only have your personal UTR number, while you’ll be using both UTR numbers if you’re in a partnership or running a limited company. Do note that your personal UTR number and company UTR number can’t be used interchangeably.
You’ll easily locate your UTR number, due to its length.
You’ll find it on various documents you receive from HMRC, such as tax returns, payment reminders, notices to file tax returns, statement of account, your "welcome to Self Assessment" letter (SA250), as well as online on your Government Gateway account (it’s located at the top right corner of your account summary).
Corporation tax is a tax levied on limited companies in the UK. Just as income tax is levied on an individual’s earnings, corporation tax is calculated based on a company’s trading profits.
At present, the corporation tax rate is 19% (2021/22 tax year). Starting 1 April 2023, the corporation tax rate will be increased to 25% for businesses with profits ranging between £50,000 and £250,000. Businesses with profits amounting to £50,000 or less will continue to pay at the current rate of 19% after April 2023.
Payment is due 9 months and 1 day after the end of your accounting period. For instance, if your accounting period ends on 31 December 2020, your corporation tax bill must be paid up by 1 October 2021.
You need to pay extra attention to your deadlines if you’re in your first trading year. That’s because you’ll have two corporation tax accounting periods—and therefore two payment deadlines.
Your first accounts will typically extend beyond 12 months, as the accounting reference date (this is decided on by Companies House) will fall on the last date of the month that your company was incorporated. For instance, if your company was incorporated on 10 June 2021, the accounting reference date will fall on 30 June 2022.
As such, your first accounts will cover 12 months and 3 weeks. Your accounting periods and corporation tax deadlines are as follows:
Reducing your corporation tax bill isn’t complicated, but it does require you to be religious about keeping track of your expenses and tax deadlines. You’ll need to claim your business expenses wherever possible, take advantage of early tax payment incentives, as well as tax allowances and reliefs.
Corporation Tax refers to tax you pay on money your company or association makes from trading profits, investments and chargeable gains.
It is calculated and paid on an annual basis, based on your ‘accounting period' for corporation tax. This is typically the same as your company's financial year. Limited companies, foreign companies with a UK branch or office, clubs, co-operatives and unincorporated associations are required to pay corporation tax on profits.
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Keep in mind that unlike most taxes, the deadline for paying your corporation tax bill is earlier than the deadline for your tax return.
Your corporation tax bill is nine months and one day following the end of your accounting period. If the end of your accounting period falls on 31 March 2019, you'll need to make your payment by 1 January 2020. The payment is made once a year if your profits fall below £1.5 million. Payment is made in instalments for businesses with profits exceeding £1.5 million.
The current rate is 19% for the 2019/20 tax year. For the tax year starting 1 April 2020, the rate will be reduced to 18%.
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How you pay your taxes changes when you become self-employed.
Instead of having your income tax and Class 1 NICs deducted at source through PAYE, you’re now required to file a Self Assessment tax return. You pay income tax on your profits (not total income), as well as Class 2 and Class 4 NICs.
Registering for Self Assessment as a sole trader is fairly simple, and can be completed online. HMRC will then send out a letter with your 10-digit Unique Taxpayer Reference (UTR), as well as set up your account for the Self Assessment online service. The registration process differs slightly if you're setting up as a limited company or limited liability partnership. You'll need to access a different registration page.
You will need to register by 5th October after the end of the relevant tax year. Here's an example: for the tax year starting 6th April 2021 to 5th April 2022, the registration deadline will fall on 5th October 2022.
You’ll need to stay on top of your Self Assessment filing and paymentdeadlines. You must complete your online filing by 31st January, while payments for your tax bill are due on 31st January after the end of the relevant tax year. For example, your tax bill for the 2021/22 financial year must be paid up by 31st January 2023.
You may already be familiar with the process of paying your Self Assessment tax bill.
Yet, it's always helpful to have a guide on hand-one that you can look over just before you make your payment, so you can be sure that you haven't missed out on important details that can put you at risk of incurring a penalty.
Tip: If the payment deadline falls on a public holiday, make sure that your payment is submitted by the final working day.
The P11D is a statutory form that records benefits in kind. These are employment benefits that employees and directors of a company have received across the year, such as company cars, private health insurance or loans.
All employers are required to file the P11D. If you’re working for yourself, such as through freelancing or contracting, you’ll also need to file the P11D. But if you’re contracting through an umbrella company, you’re not in-charge of filing the form; instead, you’ll receive the P11D from your provider.
P11D filings are due on 6th July following the relevant tax year. That means that your P11D for the tax year ending April 2021 must be filed by 6th July 2021, and any tax due must be paid by 22nd July.
When you’re filling up the P11D form, you need to report the following: company vehicles, health insurance, non-business travel and entertainment expenses, loans and company assets provided or transferred to employees or directors that have significant personal use.
You don’t need to include expenses such as: business travel and entertainment expenses, professional fees and subscriptions, uniform and tools for work and phone bills.
If you’ve submitted the P11D forms, paid your employees’ expenses or benefits through payroll or received a notification from HMRC, you’ll also need to submit the P11D(b) form. The form is a summary of the benefits you’ve provided for your employees, and also indicates the Class 1A National Insurance due on these benefits.
The P11D is a tax form that records benefits in kind that employees and directors of a company have received across the year. The information provided enables HMRC to figure out if you're required to pay tax on these benefits.
A dividend is a payment of profit that a limited company distributes to its shareholders. This is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.
Limited company directors typically draw a low salary, with most of their income being paid through dividends. By taking most of your income in the form of dividends, you can significantly reduce your income tax bill. That’s because dividends attract lower rates of income tax than salary, and no NICs are payable on dividends.
Dividends attract a much lower rate of income tax than salary does. There is also a slightly greater tax-free allowance when you are paid in dividends.
The current dividend tax rate is calculated via a combination of your income tax band and a dividend allowance.
The dividend allowance is a tax break that individuals receive on the first £2,000 in dividends i.e. the first £2,000 in dividends is tax free.
To calculate how much to pay in dividends, you have to understand income tax bands.You will have to include dividends into your income to determine your tax band.
Let's take a quick look at how £175 000 in dividend payments would be taxed in 2020.
This example assumes that your dividends are your only source of income.
To read more about dividend tax rates and allowances, check out our guide below:
Here’s a table for comparison:
Depending on whether you have a Limited Company or your operate as a sole trader, read more on claiming expense for your company below:
You can claim a range of expenses when Self Employed and you'll need to report this in your annual Self Assessment Tax Return.
Examples expenses you can claim include:
Check out our complete guide below which will walk you through all the expenses you should be claiming!
You should definitely check out all the allowable expenses for your Limited Company as this not only reduces your corporation tax but also reduces your personal tax if you are purchasing any of these items personally.
The key categories include:
As a Limited Company director you should make sure that you know what directors expenses you can claim.
The key categories include:
Speak to one of our accountants on a free 30 minute accounting consultation.