Do I have to pay a company tax as well as an income tax on my own company?
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nickyp456
1 year ago
Expert Financial Adviser Answer
Paul Richardson
answered 1 year ago
Simple answer yes - your company has to pay corporation tax and you will have to pay income tax, this is on the assumption that your company is limited
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Expert Financial Adviser Answer
Darren Smith
answered 1 year ago
Paul is right in his assertion that you are a limited company director.
the reason for this is that the limited company rules mean that you and the company are separate legal entities (hence the limited liability status) and so when determining taxation, your gross profit after all allowable costs will then be liable to corporation tax.
you will then declare a dividend from your profits and the corporation tax paid will satisfy your personal income tax liablility at the basic rate. if your dividend income, when added to all other income, takes you into the higher or additional rates of income tax you will then pay the additional amount of tax due so that you have paid the correct amount of tax.
the notional higher rate when you have dividends is 32.5% and 42.5% for the additional rate which broadly equates to the 40% and 50% standard income tax rates.
you can of course reduce your liabilities across the board and still benefit by making an employers pension contribution to you as an employee as this is treated as a business expense and will therefore be exempt from corporation tax.
feel free to get in touch if you want to talk this through more.
if however, you are not a limited company but instead in a partnership or sole trader, you and the company are regarded as the same entity and therefore corporation tax isnt due only income tax and class II and IV national insurance.
there are many ways to legitimately reduce your tax burden without leaving you worse off, i have been able to successfully improve my clients' financial position after carefully analysing their needs and structuring their income to give them what they need for now and still plan for later.
it can be a complex matter and not easy to try and cover off in this type of forum but hopefully these initial answers will give you the incentive to look at your position in more detail.
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the reason for this is that the limited company rules mean that you and the company are separate legal entities (hence the limited liability status) and so when determining taxation, your gross profit after all allowable costs will then be liable to corporation tax.
you will then declare a dividend from your profits and the corporation tax paid will satisfy your personal income tax liablility at the basic rate. if your dividend income, when added to all other income, takes you into the higher or additional rates of income tax you will then pay the additional amount of tax due so that you have paid the correct amount of tax.
the notional higher rate when you have dividends is 32.5% and 42.5% for the additional rate which broadly equates to the 40% and 50% standard income tax rates.
you can of course reduce your liabilities across the board and still benefit by making an employers pension contribution to you as an employee as this is treated as a business expense and will therefore be exempt from corporation tax.
feel free to get in touch if you want to talk this through more.
if however, you are not a limited company but instead in a partnership or sole trader, you and the company are regarded as the same entity and therefore corporation tax isnt due only income tax and class II and IV national insurance.
there are many ways to legitimately reduce your tax burden without leaving you worse off, i have been able to successfully improve my clients' financial position after carefully analysing their needs and structuring their income to give them what they need for now and still plan for later.
it can be a complex matter and not easy to try and cover off in this type of forum but hopefully these initial answers will give you the incentive to look at your position in more detail.
Expert Financial Adviser Answer
John Stirling
answered 1 year ago
It depends.
If you are taking income from your company as salary then you pay income tax (via Pay As Your Earn, PAYE, deducted at source by your company, and paid on your behalf to HMRC) but the company doesn't pay any tax on that amount, as it is a deductible expense, and not profit.
If you are taking 'income' as a dividend, then the company will pay corporation tax on the profits relating to the dividend, and you may pay higher rate dividend tax depending on your personal tax position (if you are a 40% or 50% tax payer)
If you are taking benefits in kind these will generally be classed as income and you will pay PAYE on them.
In most situations a company pension contribution is exempt from taxation up to certain limits.
There are more sophisticated extraction methods which may reduce the overall tax burden, but these are generally applicable for larger sums, and are definitely not suitable to be listed here.
In brief - seek advice.
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If you are taking income from your company as salary then you pay income tax (via Pay As Your Earn, PAYE, deducted at source by your company, and paid on your behalf to HMRC) but the company doesn't pay any tax on that amount, as it is a deductible expense, and not profit.
If you are taking 'income' as a dividend, then the company will pay corporation tax on the profits relating to the dividend, and you may pay higher rate dividend tax depending on your personal tax position (if you are a 40% or 50% tax payer)
If you are taking benefits in kind these will generally be classed as income and you will pay PAYE on them.
In most situations a company pension contribution is exempt from taxation up to certain limits.
There are more sophisticated extraction methods which may reduce the overall tax burden, but these are generally applicable for larger sums, and are definitely not suitable to be listed here.
In brief - seek advice.
Expert Financial Adviser Answer
Dr David Carter FPFS
answered 1 year ago
We all agree. You will be an employee of your company, so will personally fall into the employed national insurance and tax regime. Your company will fall into the corporation tax regime.
It will be evident that there is an interaction between the two: if your company pays your employee costs (ie, salary and NI) and makes no profits as a result, then corporation tax will be zero and your personal tax/NI (and the company's NI contribution on your behalf) will be higher.
The potential for taking funds in the form of dividends (which come from taxed profits) makes things more complex, as does the potential for the company to make pension contributions on your behalf.
This is definitely an area where good advice will pay off, and I feel that a competent accountant (or perhaps an IFA with business qualifications) would be the right person to consult.
By the way, just one more point. The term 'company' formally refers to a limited entity, and not to a partnership or sole trader. If you are a sole trader or partnership then corporation tax does not apply - the income is simply treated as your own income, with allowable expenses to offset that in order to arrive at the figure assessable to tax.
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It will be evident that there is an interaction between the two: if your company pays your employee costs (ie, salary and NI) and makes no profits as a result, then corporation tax will be zero and your personal tax/NI (and the company's NI contribution on your behalf) will be higher.
The potential for taking funds in the form of dividends (which come from taxed profits) makes things more complex, as does the potential for the company to make pension contributions on your behalf.
This is definitely an area where good advice will pay off, and I feel that a competent accountant (or perhaps an IFA with business qualifications) would be the right person to consult.
By the way, just one more point. The term 'company' formally refers to a limited entity, and not to a partnership or sole trader. If you are a sole trader or partnership then corporation tax does not apply - the income is simply treated as your own income, with allowable expenses to offset that in order to arrive at the figure assessable to tax.
