Setting up as a limited company is certainly no easy task. From finding the perfect name for your business to registering at Companies House, becoming a limited company is often a road filled with all manner of red tape and convoluted paperwork. However, despite how daunting the initial setup might seem, this is still the most profitable working option for the majority of self-employed professionals.
Lending your business a certain sense of credibility and protecting you with limited liability status, perhaps the biggest pull of operating as a limited company comes from the fact you could experience all kinds of tax benefits. But exactly how much tax should a limited company expect to pay in 2019?
Why IR35 is Important for Limited Companies
Before you even start thinking about any potential tax benefits, you need to understand why IR35 is so important to limited companies and how it could impact the amount of tax you end up paying. Introduced as part of the Finance Act, 2000, IR35 is legislation brought in to prevent contractors from gaining tax relief as “disguised employees”.
Disguised employment is where a worker will supply their services to an organisation through an intermediary (most commonly a limited company), but where this relationship would have been one of regular employment if not for that intermediary. If you’re found to be in breach of IR35 by HMRC, then you’ll have to pay the same Income Tax and National Insurance Contributions (NICs) as any other regular employee.
If you’re running a legitimate business, however, then you should be operating well outside IR35 and have nothing to fear from this particular piece of legislation. Even so, if you’re planning on setting up your own limited company, then it’s certainly something you need to know about—as getting caught by IR35 can cause incredibly damaging financial implications.
What Tax Does a Limited Company Pay?
In short, the owner of a limited company will pay tax on both their personal income and business profits. On the surface, this may sound like you’ll be paying even more tax than a regular employee but, so long as you remain outside IR35, the tax benefits of becoming a limited company are what makes this such an appealing form of self-employment.
In the 2019/20 financial year, Corporation Tax is charged at 19% of your taxable profits, although this is reducing to 17% from April 2020. This tax is typically paid directly to HMRC every 12 months, and registering for Corporation Tax is one of the first things you need to do when setting up as a limited company.
Although 19% might seem like an awful lot of money, you should be able to reduce your taxable profits by claiming Capital Allowances and other business expenses.
Employers’ National Insurance Contributions (NICs)
Although every worker should expect to pay National Insurance, some limited company owners may find themselves completely exempt from these payments. If you earn a salary of under £165 a week, for example, then you won’t have to pay any National Insurance whatsoever.
Of course, such a meagre salary may not exactly have the eyes gleaming in anticipation, but you can always significantly lower your salary by paying yourself through dividends instead. In the likely event you do have to pay National Insurance, however, then earnings between £166-£952 will result in a contribution of 13.8%.
Value Added Tax (VAT)
Any limited companies which earn an annual turnover of more than £85,000 will have to register for VAT. Once you’ve registered, this means that you’ll be charging customers and clients VAT on HMRC’s behalf, which you’ll then pay directly to them on a quarterly basis. Before paying HMRC, you can also deduct any VAT you might have spent on business expenses during that timeframe.
Limited Company Owners: Personal Tax
Every limited company owner needs to submit a Self-Assessment form to HMRC on an annual basis. This form will provide details regarding your personal income, allowing HMRC to charge the proper level of income tax.
Paying Yourself Through Dividends
However, it’s important to understand you’ll only be taxed on your personal salary, not the overall income of your limited company. Of course, this is one of the main reasons it’s so beneficial to keep yourself on a low income and pay yourself through dividends instead—although this won’t reduce the amount of Corporation Tax you have to pay.
How a Specialist Accountant Could Help
The tax benefits of becoming a limited company should be clear to see. However, staying in line with complicated tax laws can quickly become completely overwhelming, particularly if you’re new to the world of self-employment and have no previous experience in managing your finances.
The team at Brookson are the experts when it comes to limited company accounts, and we have the knowledge required to truly maximise your take-home pay in 2019. By ensuring you’re never in breach of any unknown tax laws and helping you stay on top of deadlines, we offer the support and advice your company needs to become a true success. Contact us today to find out more about our fantastic service!