Corporate Tax

A limited company is a business that is a separate legal entity from its owners. They are owned by share holders and ran by directors. Limited companies that have fewer than five director- shareholders are referred to as close limited companies.

The advantages of using a limited company are a beneficial rate of tax and certain limited liability protection from insolvency.

As a director of a limited company it is possible to receive ‘director’s fees’ equal to the secondary threshold limit for national insurance each year. This amount is currently £7,696 for 2013/14 and is received tax free but can be deducted against income in arriving at a company’s taxable profit. As a shareholder of the company any remaining profits after paying corporation tax can be paid as a dividend. Dividends are classed as investment income and are taxed after non-savings & savings income. If your total income for a tax year does not exceed the basic rate band there will be no further tax to pay on the dividends. As there is no national insurance on dividends this makes the limited company very attractive.

You may be aware from the most recent budget that the main rate of corporation tax will be reduced to just 20% from 1st April 2015. The government has promoted this as the UK being open for business and some larger organisations have already announced they will be relocating to the UK to take advantage of this. However If your business operates at a profit of under £300,000 you will already being paying tax at 20%.

Corporation tax is usually payable once a year and HMRC will expect their money nine months after you have completed your year end. As we all know this wouldn’t it make sense to make provision for this tax or at least have your company accounts prepared soon after your year end so that you know what tax is coming up.

The amount of tax you pay tax is calculated on the profit of your business after deducting allowable non accounting expenses e.g. capital allowances and adding back non allowable expenses e.g. depreciation. The rates for capital allowances indirectly affect the amount you initially pay for an item of plant & machinery, office equipment or motor vehicle so it is important to be familiar with them. For example if a company purchased plant & machinery on the 31st March 2012 for £100,000 they could receive an immediate tax reduction of £20,000, when the annual investment allowance was £100,000. If the same company purchased the same plant and machinery a day later, on the 1st April 2012, they would only receive a tax reduction of only £7,700, because the annual investment allowance was reduced to £25,000. The annual investment allowance from 1st January 2013 will be £250,000 fixed for two years.

If you would like to discuss your corporation tax issues with us please call on 0845 345 7785.

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