Explaining Limited Company Tax
If you’re starting a new business, one of the most attractive options to consider is forming a limited company. Limited companies are unique due to the fact that their owners (normally in the form of shareholders), are legally separated from their managers and are required to register with Companies House. One of the benefits that this approach can provide involves a reduced tax liability. However, appreciating the basics of limited company tax requirements is important if you hope to avoid making any mistakes when filing an HMRC tax return. Let’s take a look at what you need to know.
The Basics of Limited Company Tax Requirements
One of the main takeaway points is that a limited company is not obligated to pay contributions towards income tax or National Insurance. Instead, they are taxed based upon their annual profits (this is known as corporation tax). At the time this article was written, the current limited company tax rate is currently 19%.
We need to keep in mind that the tax rates mentioned above are a lot lower than those associated with sole traders. Sole traders are required to pay a tax on all profits which exceed their allowances. Any business which earns an income above £50,000 per year will automatically be obligated to pay a rate of 40%. In terms of a limited company, your rates are capped at a flat 19%.
The Advantages of Claiming More Expenses
Professional accountants will also highlight the fact that a limited company will normally be able to claim more business expenses on their HMRC tax return when compared to sole traders. Any allowable expenses will automatically be deducted from your profit margins and so it will not be taxed under the current regulations. On a final note, it is also often possible to claim deductions against any pension related contributions.
Are There Any Possible Drawbacks?
It is also wise to mention that under the limited company framework, you will need to pay an initial incorporation fee to Companies House. Accountants can explain the associated expense in greater detail. Also, the names of a limited company may be subject to a number of restrictions. The associated filing requirements can be slightly more complex when compared to a sole trader.
Limited company taxes offer a number of benefits. Before filling out any company tax return it is always a good idea to speak with a professional. This will make sure that no errors are made. The team at SRG LLP are always here to help. If you have any additional questions, please do not hesitate to contact us. We look forward to hearing from you.