Register for Taxes
There are three main taxes which you will need to ensure that the company is registered for: PAYE; VAT and Corporation Tax. In addition to this, any directors or shareholders (where dividend income stands to exceed £10,000) will need to register for a self-assessment tax return.
PAYE and VAT registrations can be completed online via HMRC’s website immediately. Shortly after incorporation HMRC will send a notice ‘Corporation Tax – New Company Details’ which will contain a reference number needed to complete the registration for Corporation Tax. You may already be registered as a self-assessment tax payer, if not then you will need to complete an SA1 form which can be downloaded from HMRC’s website.
Your Tax Obligations
As the director of a limited company, you are responsible for ensuring that the company submits returns and pays all taxes by their respective due date. You will also be required to submit a tax return to HMRC containing all of your personal income, and pay over any tax arising on that income. This section of the guide will outline the various tax obligations that you will have as a director.
Your obligations to HMRC on each of the above taxes and more are outlined in more detail on each of the pages below:
One of the main advantages of trading through a limited company is the many tax planning opportunities that can be utilised by operating in this way. The most common tax planning techniques for contractors are outlined below:
The simplest and most commonly used tax planning method is to strike a balance between remuneration and dividends, which minimises the overall tax of both the individual and company. The way to achieve this (in the majority of cases) is to pay a salary to the director at the National Insurance (NI) earnings threshold, some pension contributions and then to pay dividends out from the profits made by the company. By paying a salary of at least the lower earnings limit for NI (different from earnings threshold), the recipient will earn a qualifying year for their state pension (of which they must reach 35) without actually incurring any National Insurance.
By trading as a limited company, you can gift shares in the company to a spouse or civil partner (with whom you are living). The judgement from a landmark court case (Arctic Systems; 2007) went in favour of the taxpayer and left income-shifting as one of the most effective tax planning methods available for small business owners as it allows the individual to utilise the basic rate allowance of a second individual if not already used. Gifts of assets between spouses/civil partners are free of Capital Gains Tax; this exemption extends to dividends paid on shares gifted providing the following conditions are met:
- Only ordinary voting shares, with the same rights attributed to them should be transferred;
- It must involve a couple who are both married/civil partnered and living together; and
- Shareholders must not waive dividends.
In the majority of circumstances, the contractor will be the director and shareholder of the company which means that they are in control of the timing of dividends. This control allows them to defer dividends (and therefore the income tax liability on the dividend) to a different tax year or indeed pay out high levels of dividends (profits depending) at times when it is advantageous to do so. Contractors should always ensure that (providing that they have profits to support it) they utilise their basic rate tax allowance in its entirety – once the tax year passes, any unused allowance will be lost.
When considering tax planning, it may also be worth considering the tax consequences of the eventual disposal of the business as this can give rise to preferential rates of tax. Under current legislation, when a business is closed – reserves of up to £25,000 can be treated as a capital distribution for tax purposes (higher amounts can still benefit from this if the company is formally liquidated by a suitably qualified insolvency practitioner). The capital taxes regime taxes gains at 18%/28% depending upon your higher rate tax status, however if the conditions for entrepreneurs relief are met then gains will be taxable at 10% - giving rise to a significant saving in some cases.
Why Choose Nixon Williams?
At Nixon Williams our aim is to assist in making your contracting life easier by removing the stress normally associated with accounting, taxation and other financial issues experienced by contractors.
Each of our clients are provided with a single point of contact that will be on hand to assist with any accountancy or tax related queries.