Taxation doesn’t have to be intimidating. Get the balance right between the various types of income and related tax, and you can achieve that goal of tax efficiency that sent you down the limited company route in the first place.
When do I need to register for VAT?
VAT registration is mandatory for companies who have made taxable sales in the last 12 months above the current VAT registration threshold amount. For the 2018/19 tax year this is £85,000. HMRC usually increases the threshold by around £1,000 each year so for the 2019/20 tax year the threshold is likely to be higher. Even if your sales are unlikely to reach this level you can still voluntarily register your company for VAT. Many contractors choose to do this as it can offer several advantages, such as claiming back VAT on invoices they receive. If you decide not to register but you believe you’ll exceed the threshold in the near future (if you win a huge contract for example) you should register as soon as possible to remain within HMRC rules.
How to register for VAT
You need to apply directly to HMRC to register your company for VAT. This can be done online using their website or by post. You can do this yourself or your Intouch accountant can do this for you on your behalf.
Quarterly VAT returns at Intouch
At Intouch Accounting we offer Quarterly VAT return administration as a standard part of our all-inclusive comprehensive Monthly Service package. Contact us to find out more about our services and how we can help take the stress out of running your business.
How does Corporation Tax affect me?
Corporation Tax is the tax your company will pay on the profit it generates in an accounting period. This is calculated once a year with your yearend accounts.
Corporation Tax is currently 19% and is payable from the company bank account to HMRC. In your first year of trade you will submit two Corporation Tax returns as your accounting period will be slightly longer than a year.
Let your Personal Intouch Accountant take the hassle out of understanding how Corporation Tax affects you. Find out more today about our award-winning services and how easy it is to become a client.
How does National Insurance work for a contractor running a Limited Company?
Contractors running their own Limited Company pay two types of National Insurance (NI) through the business. Part of it is an employer liability and part of it is the employee’s (contractor’s) liability.
Where an individual receives earnings and benefits from a Limited Company then the company has to pay Class 1 National Insurance on the earnings and Class1A on the benefits.
No contributions are payable on the first £702 of your monthly pay, then 12% until £3,863 per month, and 2% thereafter (2018/19).
The same rate applies to relevant benefits in kind under Class 1A. In the 2018/19 year, a company may be entitled to claim the Employer Allowance enabling the first £3,000 of employer National Insurance not due to be payable to HMRC.
An employee also has to pay National Insurance contributions on their earnings also under Class 1. The same exemption applies to the first £702 per month, and then the rate is at 12% on the band until earnings reach £3,865 per month.
For amounts in excess of £3,865 per month the employee pays a reduced rate of 2% without an upper limit.
What has to be entered on a Self Assessment Tax Return?
Directors may have other personal income from investments, savings or other businesses, which have to be entered on a Self Assessment Tax Return (SATR). For contractors and freelancers using Limited Companies to trade, the most common form of income tax due apart from PAYE on their salary/wages is on dividends they award themselves.
Each year SATR have to be filed with HMRC no later than 31 January (in the calendar year following the end of the tax year). Payment of any tax due is made in two instalments at the end of January and July starting in the tax year.
Intouch’s team of Personal Accountants are on hand to make their client’s SATR run as smoothly as possible, and be completed long before the deadline – meaning they have one less thing to think about over their Christmas period. Simply get in touch to find out more.
What is income tax and PAYE?
Individuals pay Income tax based upon their earnings including benefits in tax years. Income tax normally comes from earnings as an employee and is paid to you after personal tax has been deducted. Tax deducted from your earnings is called PAYE (Pay as you earn).
What is the tax on dividends?
The first £2,000 of dividends are tax free, then any dividends taken thereafter are taxed up to 7.5%. Should you reach the higher rate tax threshold the tax rate on dividends is 32.5% thereafter.
As a Limited Company what are the tax requirements?
From the company’s point of view it will probably have to submit VAT returns, and account for PAYE, National Insurance and Corporation Tax on profits. Individuals have to submit personal tax returns under self assessment.
If a company is VAT registered it must charge VAT on invoices it issues. The client then pays the total invoice value, and your Limited Company pays the VAT element over to HMRC each quarter. The amount payable can be reduced by any VAT your company has paid on business purchases, for example on stationery, telephone bills.
HMRC allow certain companies to register for VAT under the Flat Rate Scheme. This enables the company to simply pay a pre agreed (“flat”) percentage of turnover as VAT rather than calculate the actual amount due on sales less the amount repayable on purchases. The advantage of this is that it’s easier, and the company will make a small profit.
Once you become an Intouch client we will advise you on the VAT scheme appropriate to you, and the amounts that are due to be paid. It is then your responsibility to make the actual payment.
This is paid each quarter according to the tax and NI deducted from any wages paid. We will inform you of the amounts due in advance, and you simply then make the payment.
Corporation Tax is paid 9 months after your company year end, and is based on the profits.
Personal Tax this is payable each January and July, as per your self assessment tax return. The amount due depends on the value of dividends, rental income, bank interest, capital gains and anything else not taxed at source.
Don’t let tax be taxing! Whether you’re looking to switch accountants or just starting out in contracting, our specialist contractor accountants have the expertise to handle everything for you, helping you maximise your income whilst staying on the right side of the taxman. Get in touch today.
Do I get more take home pay with a Limited Company?
What about tax and a personal pension?
A Limited Company can pay up to £40,000 per year into an employee’s personal pension, and will get Corporation Tax relief for those contributions.
You should ensure that the payments go direct from the company bank account to the pension provider. Pension contributions are also an allowable deduction for IR35 deemed salary calculations.
When you’re contracting, you no longer have access to company employee benefits, meaning trying to navigate the best possible way to optimise your earnings and savings can be more complex.
All Intouch clients have complete access to Brookson Financial, a specialist team of Financial Advisers that pride themselves in understanding the unique opportunities and challenges self-employment brings. Working closely with your Intouch Personal Accountant, Brookson Financial’s solution provides access to expert financial advice and products that have been designed with the contractor in mind. If you want to find out more about our collaborative contractor-specific approach to your business and finances, get in touch now.