Company taxation is complicated, and more so in the current environment than ever before, but the main taxes are:
- PAYE Income Tax and National Insurance, deducted from salaries paid to the director(s), company secretary and any other staff – under the IR35 rules the main earners salary is set at a minimum level.
- Corporation Tax paid on company profits. The profits are after deduction of directors/secretary’s salaries. Dividends are paid out of profits after Corporation Tax and are subject to Dividend Tax personally.
- Value Added Tax.
The split between Income Tax/NI and Corporation Tax is dependent on whether you take money out of the company by dividends or salary, and in turn this affects the directors personal tax situation and IR35 issues. For a PSC the company income is the “wages” earned by the contractor personally, and therefore the important thing is to minimise the overall tax burden paid to the government.
Dividend or salary
The contractor working through their own company will have a choice of taking money out of the company by salary, which is a reward for thier work, or dividends on their shares, which is a reward for their investment in the company.
A salary is subject to Income Tax and National Insurance, a dividend just Income Tax (via Dividend Tax regime), so all other things being equal it is better to have a high dividend and low salary to minimise National Insurance costs – this is where most of the savings through having a company will be made. However a low salary does restrict the amount which can be paid into a pension scheme. Where contracts are caught by IR35 a minimum percentage of the contract revenue must be paid as salary.
PAYE stands for Pay As You Earn, and is the system which employers (ie your PSC) are forced to operate to collect Income Tax and National Insurance from employees (ie you as a director). These notes assume that you as director are the only company employee, although they would also apply to your company secretary if they are paid and any other paid staff.
Under PAYE Income Tax is calculated by reference to your earnings, less a tax free amount determined by your tax code. Earnings over the tax code are taxed at 20% 40% or 45% as appropriate. The earnings and tax are then carried forward to your summary position for the year.
There are two types of National Insurance payable. Employees NI is deductible from your salary, and Employers NI is payable by the company on your salary; of course as its all your money in the first place the difference is academic.
Tax and NI rates are set out in a separate document in this section.
PAYE is now subject to the Real Time Information reporting regime.
The company pays Corporation Tax on its profits. Basically profits are income, less expenses, less directors (and other) salaries. Rates are set out in a separate document in this section.
Corporation Tax is 19% from 1 April 2017 (previously 20%). From 1 April 2015 the main rate and small company rate are merged, and the former regime of marginal relief is abolished.
Corporation tax is payable nine months after the end of the company’s tax year, under CTSA (Corporation Tax Self Assessment).
Dividends are paid out of profits after Corporation Tax and are subject to Dividend Tax personally.
Personal Income Tax
For any given tax year, your salary and dividends from the company and any other income such as rent received, investment income or pension income will be aggregated via your Self Assessment Tax Returns.
Tax is calculated in slices:
- Savings income is the first slice
- Salaries and rental income is the next slice
- Dividends are the top slice
and the net amount will be subject to Income Tax at the following rates:
Tax paid under PAYE or other tax deducted at source is set off against the overall liability.
To the extent that dividend income falls into the basic rate band, the first £5,000 is taxed at 0% and the remainder is taxed at 7.5%. Additional dividend income falling into the higher rate band is taxed at 32.5%.
Examples and Calculator
On our website we have:
- An example of the tax calculation at different rates
- A summary of tax and take home at different rates
- A calculator for you to model your own figures
VAT is a completely different tax, based on transactions rather than profits/income.
Full details are in the separate VAT guidance on our web site.
When is tax due?
PAYE/NI – Normally calculated monthly and due by 19th day of next if paying by cheque, or 22nd if paying electronically. Operates under the RTI regime.
Payments not received at HMRC by the due date will give rise to penalties.
Payments must be made monthly, or quarterly if payments are less than £1,500 p/m on average.
Corporation Tax – Corporation Tax is calculated when the year end accounts are prepared and is due 9 months and one day after the year end. For 31 March year ends the payment date is 1 January the next year.
Income Tax (including Dividend Tax) – Due under the Self Assessment regime on 31 January after the tax year, i.e. 31 January 2018 for the 2016/17 tax year ending 5 April 2017.
There may be payments on account due for a tax year if your Income Tax, after deduction of tax at source, exceeds a trigger limit for the previous year. For 2016/17 payments on account would be based on the 2015/16 tax liability and would be due on 31 January 20177and 31 July 2016 with the balance due on 31 January 2018. On 31 January 2018 you may also have to make a payment on account for 2017/18 as well, etc.
Interest is normally charged on overdue tax payments, although small interest charges are not pursued by HMRC. Interest rates are in line with bank borrowing rates and are not onerous. Personal Income Tax liabilities due under Self Assessment are subject to a 5% surcharge if paid more that 30 days late.
VAT is due on a quarterly basis, payable 1 month and 1 week after the quarter end. We normally arrange for the quarter end to tie in with the PAYE quarters. There is an onerous penalty regime for late VAT payments, so it is important to stay on top of VAT matters.