This is a step up from self employment, and usually comes with more administration because the company needs to file its own accounts and tax return as well as the owner(s) still likely needing to file their own self assessment tax returns too.
Depending on the level of profits being generated, a company can result in some tax savings compared to being self employed. Paying 19% corporation tax can end up being less than paying 20% income tax and 9% national insurance, even though the percentages above seem really obvious which should be more tax efficient – it really boils down to the level of profit being made.
Other benefits of setting up a limited company may be to provide yourself with some protection against difficult customers. For example, being a Limited company will usually mean the buck stops at the limited company if anything goes wrong, whereas if you were self employed then the buck could stop at you personally.
Another benefit is the perception of your business being more permanent and lasting. Some contracts and projects for example may only want to work with limited companies rather than individuals, and it may be perceived that a company is safer to trade with.
Something to consider even though trading through a limited company provides more protection, is insurance. This should mean that if any unfortunate accidents happen while you are trading then your insurance policy will likely mean they will compensate your customer and possibly you if a dispute arises. Many insurance policies don’t cover negligence or deliberate acts by a business, so just because you have a policy in place doesn’t mean you have a get out of jail free card should the worst happen.
Finally, limited companies offer the opportunity to pay dividends to its owners These tend to be the most tax efficient method of getting hard earned money into your personal bank from a company.
This is tax that a company pays on its profit, just like a self employed person would pay income tax and national insurance on their profit.
By profit we mean the number after we add up all the sales and subtract all the costs. For example, if the company buys something for £100 and sells it for £200, then it has generated a profit of £100. Maybe some telephone costs, rent, insurance and accountancy fees reduce this profit a little more to say £50. This would mean the company pays over 19% of £50 in corporation tax.
For the tax year 2020/21 the rate of corporation tax is 19% but this can increase or decrease depending on the Government in power and the targets they want to achieve. Around the time of the financial crisis in 2009, this rate was as much as 26%.
You will be able to find out the latest details at Corporation Tax Rates.
Corporation tax needs to be paid 9 months and 1 day after the company year end. This means that if your company has a year end of 31st of March, then the Corporation Tax will need to be on 1st on January at the very latest to avoid late payment penalties and interest.
Once a company year end has passed, it has 9 months to prepare and submit company accounts to Companies House.
For example, if its year end is 31st of March, then it must file its accounts no later than 31st of December to avoid late filing penalties.
The directors of the company have a responsibility to file accurate financial statements that comply with current legislation, of which there are a few variations, stated below in increasing order of complexity.