Navigating the world of taxation can be a daunting task for directors of limited companies and the consequences of non-compliance can be severe.
Understanding the nuances of this complicated subject is also crucial for optimising the finances of the business and your personal wealth.
Here are some key tax considerations that every director should be aware of.
One of the first responsibilities for directors is to ensure that their company pays Corporation Tax.
This tax is levied on the company’s profits, and it’s the director’s duty to calculate, pay, and report this to HM Revenue and Customs (HMRC).
Currently, the rates are 25 per cent for companies making a profit of £250,000 and above, 19 per cent for those companies earning £50,000 and below, and a marginal relief tax which varies for companies making a profit between these two amounts.
Failure to comply can result in hefty fines and penalties along with reputational damage and financial insecurity.
Personal Tax and National Insurance Contributions
Directors usually draw a salary from the company as part of their renumeration, and this income is subject to Income Tax and National Insurance Contributions (NICs).
Historically, it has often been advisable to take a lower salary and receive the rest of your income as dividends, which can be more tax efficient.
Dividends are a great way to distribute the company’s after-tax profits among shareholders.
Many people falsely believe that dividends are not taxed but, whilst dividends are not subject to NICs, they are taxable in other ways.
They come with a tax-free allowance of £1,000, where a zero per cent tax rate applies.
As of 2023, dividends are taxed at 8.75 per cent for basic rate taxpayers and 33.75 per cent for higher rate taxpayers. This is still lower than the income tax rate for the highest earners, which is 45 per cent.
An accountant can help you create a tax plan that is efficient and gives you the best possible benefits in terms of personal wealth.
If your company’s turnover exceeds the VAT threshold (£85,000 in 2023), you must register for VAT.
This involves charging VAT on your products or services and reclaiming VAT on your business-related purchases.
Accurate record-keeping and timely VAT returns are essential to maintain a smooth financial situation and remain compliant with HMRC’s regulations.
Business expenses can be deducted from the company’s profits, reducing the Corporation Tax liability.
However, these expenses must be ‘wholly and exclusively’ for the purposes of the business.
Personal expenses cannot be claimed, and doing so can lead to scrutiny from HMRC and possible penalties if you are found to have made false claims.
Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA)
New Government legislation will enforce a digital approach to tax returns in 2026 making it imperative to understand the process as soon as possible.
The legislation means keeping digital records and using compatible software to send updates to HMRC rather than outdated paper documentation.
Directors who also have other income sources, like dividends, will need to be particularly vigilant about this new requirement and factor this into their own ITSA returns at the end of each year.
Corporation Tax, VAT, personal taxes, and expenses are all highly complex issues, but all are navigable with the right knowledge and advice from an expert accounting professional.
With the introduction of MTD for ITSA, staying digitally compliant is also becoming increasingly important and accountants can help with this too.
Consulting a tax advisor can provide tailored guidance for your personal and business finances, helping you make informed decisions for both yourself and your company.
Our accounting team is ready to guide you through the process of limited company taxation, please get in touch to find out more.