A limited company is a separate legal entity, so it pays its own taxes and the people who run it pay theirs. Four taxes matter most:
- Corporation Tax on the company's profits, whatever the turnover.
- VAT, once the company's taxable turnover goes over £90,000 in the last 12 months or is expected to in the next 30 days. A company can also register voluntarily below that.
- PAYE, which the company operates on any salary it pays, including a salary paid to a director.
- Self Assessment, which a director may need for income that has had no tax taken off, such as dividends or rental income.
How the taxes connect
The company can deduct costs incurred wholly for the business when it works out its taxable profit, and a salary paid to a director or employee is one of them. The company must register as an employer to pay a salary, deduct Income Tax and National Insurance contributions through PAYE and pay the employer's contributions as well.
Dividends work differently. A company can pay a dividend only out of its available profits, and cannot count it as a business cost, so it does not reduce Corporation Tax. The company pays no tax on the dividend, but the shareholder may owe Income Tax on it. A shareholder with taxable dividend income of up to £10,000 can report it on a Self Assessment return or, if they do not file one, ask HMRC to collect the tax through their tax code. Above £10,000, a return is required.
Two bodies, two sets of rules
Companies House holds the public record of the company. It requires annual accounts and a confirmation statement at least every 12 months. HMRC deals with tax: the Company Tax Return, VAT returns, PAYE submissions and a director's Self Assessment return.
The two coordinate when a company is formed, but their deadlines and penalties are separate, so filing on time with one does not protect you with the other.
Deadlines to diarise
- VAT return and payment
- 1 month and 7 days after the period ends
- PAYE payment
- 22nd of the next tax month
- Self Assessment return and tax
- 31 January after the tax year
Getting set up with HMRC
Registering the company with Companies House usually sets it up for Corporation Tax at the same time, unless it is dormant. HMRC then posts the company's Unique Taxpayer Reference (UTR) to the registered office, so check that address is correct.
If you registered by post, through an agent or with third-party software, or did not activate a business tax account, add the Corporation Tax service to the account yourself. The company must file a Company Tax Return even if it makes a loss or owes no tax. VAT and PAYE are separate registrations, made when the company reaches the VAT threshold or before its first payday.
Legal basis
Primary legislation and key regulations