This article aims to provide a high-level overview of the variety of taxes that exist for both companies and individuals.
A limited company has to account for and pay a range of taxes to HMRC. These often include VAT (Value Added Tax), PAYE (Employers income tax and national insurance), and Corporation Tax.
An individual whether self-employed or employed, director, or shareholder must be aware of their income tax and national insurance responsibilities.
Financial Year versus Tax Year
The first key difference to understand is that a company’s tax year is not necessarily always the same as the traditional tax year. A tax year runs from the 6th April to the 5th April of the following year. As an employer or an employee PAYE (Pay as You Earn) or income tax and national insurance contributions are always all aligned to the tax year. For those of us who are self-employed and are eligible for a self-assessment, this tax is also aligned to the tax year.
A company’s financial year is a 12-month period that can start and end in any month of the year. The initial start date is the date of incorporation. Think of the incorporation certificate of the company as being its birth certificate. On the anniversary/birthday, the year-end date falls. Corporation tax is payable based on the company’s financial year.
COMPANY TAXES
Corporation Tax
Corporation tax is a tax for businesses and is calculated based on the taxable profits achieved during the financial year. The calculations are completed and reported to HMRC on a Corporation tax return called a CT600 once a year. Payment of corporation tax must be made to HMRC within 9 months of the company’s financial year-end. While you are allowed 12 months to file the CT600 form, this form must be completed to calculate the amount payable. It's prudent to file it within the 9 months deadline.
Value Added Tax (VAT)
Value Added Tax is a tax that is calculated on taxable supplies it makes and receives. If a business is registered for VAT it will be required to charge vat on any supplies or services that are vatable. Likewise, the business is also likely to pay other businesses goods and services that are vatable when it purchases such goods or services. This tax is collected and paid by each vat registered business during its trading activities. Vat charged out on services and goods is known as vat chargeable. Vat paid on goods or services purchased is known as vat claimable. The net of these two amounts results in either a vat claim or reclaim.
Every 3 months (a VAT quarter) a VAT registered business must submit to HMRC a vat return. VAT returns must be filed and payments made to HMRC with 1 month and 5 working days after the quarter-end for which the vat return is being prepared.
Not all businesses are required to be VAT registered. The mandatory registration threshold is income or revenue in a financial year that exceeds £85,000. The business is required to register by the end of the following month where it is determined that the threshold has been met.
Alternatively, you can register for VAT even if the business income does not meet the threshold where it is beneficial to the organisation to do so e.g., the purchase of vatable goods or services exceeds the vatable sales thus resulting in a vat reclaim.
PAYE (Pay as you Earn)
Any company that has employees (persons that are paid for their services by the company and are employed directly by the company) must be registered at HMRC as an employer. Once registered the business will receive details of their PAYE scheme from HMRC. As mentioned previously, PAYE is aligned with the tax year. A business with a PAYE scheme collects income tax and national insurance contributions from its employees. In addition to these amounts collected from employees, the business as an employer must itself pay Employer National Insurance. All the contributions are combined and paid across to HMRC by the 19th day of the month for which they relate.
Information about employees’ tax and National Insurance is reported to HMRC each time a payslip is issued to an employee using the HRMC automated system called RTI (Real Time Information). This must be done before the employee can be paid.
Self-Assessment Taxes
Self-assessment of income tax is related to an individual and not a business and is aligned to the tax year. This is where an individual has perhaps several sources of personal income for any given tax year. The aim is to determine if any additional tax is due to HMRC or if there have been any overpayments in which case a refund may be due.
The self-assessment tax return and the tax payable must be submitted to HMRC by the 31st of January following the end of the tax year being reported. i.e. a tax return for the tax year 2019/2020 reports on income for the period 6th April 2019 to 5th April 2020. The deadline for filing and payment, in this case, is 31st January 2021.
Class 2 National insurance contributions are also payable and are based on the number of weeks of self-employment in the tax year. Currently, in 2020/2021 the rate per week is £3.05.
Class 4 National insurance contributions are due only when the profits are over a certain level. In 2020/21 the profit level is £9,500 per year and is chargeable at 9% on profits up to £50k in which case the rate drops to 2%.
P11D – Benefits in Kind.
If someone in a business enjoys a benefit personally of something the business provides them e.g., company car, interest-free loan, gym membership, personal health insurance, etc then it must be reported to HMRC using a form called a P11D. This form reports the benefits and the facilities provided to the individual by the business. The company must then pay Class 1A National Insurance on the cash equivalent of the benefit. In addition, the employee's tax code will be adjusted and additional income tax will be deducted from the employee’s salary going forward. The deadline for submission of the P11D to HMRC is the 6th July following the tax year it relates to. Payment of any amount due must reach HMRC by 19th July
If you require help with any of these taxes, you can get in touch in the following ways:
Email: janet.jensen@ekstraas.co.uk
Tel: 07458 302 512
Website: www.ekstraas.co.uk