The Amount of Tax That a Limited Company Pays in the UK
An advantage of forming a limited company is that it can reduce your tax liability. But companies have to make sure they pay the right amount of tax and deal with their finances slightly differently than freelancers or self-employed workers.
The Usual Tax Liability for a Limited Company
Limited companies do not actually need to pay income tax and National Insurance. What they have to pay is its corporation tax on their profits. The rate for this is 19%.
How Do They Pay Their Corporation Tax?
Corporation tax is a 19% deduction of all profits. This means that if, for example, your limited company makes £100,000 profit in 2017/18, you pay a corporation tax of 19% on that money. That's £19,000.
Coefficient of Disposable Earnings (CoDE)
If you are self-employed or have a different type of income, you might use the CoDE instead. To do this, multiply your income by 11%. The result is your CoDE. You then apply 10% of your CoDE to your income. This is how much you can earn before paying any tax. So if your CoDE is £11,000, you can earn up to £11,000 before paying tax on it.
How Do I Get Paid through a Limited Liability Company?
If you earn money from your business, the money will not be paid to you. It will go directly to your business account, and you can't just withdraw it whenever you want. Instead, you must declare a dividend or take a salary.
How Do I Declare a Dividend for My LLC?
If you want to declare a dividend for an LLC, you'll need to fill out and send Form 1065, an informational form that lets the IRS know how much money gets distributed from your LLC. Any money distributed from your business will not be taxed.
What Are the Tax Implications of Paying Myself a Salary?
In your capacity as a freelancer, you can deduct your salary from the profits of your small business. Depending on your salary and your circumstances, personal income taxes may be due at tax time and potentially National Insurance.
If you like, you can avoid paying taxes by paying yourself less than the threshold for National Insurance. This will mean that you consider your freelance earnings a hobby and treat them as such.
What Is a Dividend?
A dividend is a share of the company's profits that is paid to its owners, also known as shareholders. 'Shareholder' is the legal term for someone who owns all or part of a company.
What Is the Best Way to Take a Dividend?
First, check the company's financial situation. At the same time, ask your accountant to help you create a dividend voucher. This will detail the company name and the amount of the dividend that has been assigned to you. Limiting dividends to no more than two payments per year is also a good idea. This will help you avoid drawing unwanted attention from tax authorities.
As you can see, despite being named 'self-employed', there are quite a few differences between being a freelancer, owning your own limited liability company, and being self-employed. One of the biggest is that, as an LLC, you pay corporation tax instead of income tax, meaning you're less likely to be penalised by the tax authorities.
Another advantage of an LLC is that you can choose to pay yourself a salary or take a dividend. If you take a salary, you will pay income tax, but you won't have to pay National Insurance.
If you are looking to acquire accountancy services for limited companies, look no further than our expertise here at 1 to 1 Accountants. We are an accountancy firm based in the UK, serving small businesses and freelancers. Call us today and let us compute all your venture’s taxes in no time!