Limited Companies
Limited Companies are legally distinct bodies that keeps the business finances separate from the owner’s personal finances. One person can set up a limited company and own a 100% share of the business or multiple individuals can set it up and divide the shares between them. Owners of limited companies are therefore known as shareholders. Because the business has a separate legal identity, registered with Companies House, it can enter contracts and be sued in its own right. It can also become a partner in other businesses.
The business can own assets and keep any profits that it makes, after tax.
Essentials Tip: pUBLIC, PRIVATE OR BY GUARANTEE
There are three types of limited companies in the UK:
Private Limited Company
Shares are not available for sale to the public
Public Limited Company
Shares are available for sale to the public*
Limited by Guarantee Company
A business that is not run for profit
*A company must have issued shares to the value of £50,000 before it can trade on the Stock Exchange
Limited companies are run by a board of directors (known as company officers). There must be at least 2 directors within the business who can also be shareholders of the business.
- Shareholders’ personal finances are kept separate from the business’s finances
- Limited companies can be more tax efficient than other business structures
- Limited companies have a separate legal identity
- Limited companies can own assets and enter into contracts
- Disagreements between partners on business decisions can happen
- Partners are liable for all debts and losses
- Without public financial reports, it is difficult for partnerships to raise finances from traditional lenders
Accounting
The board of directors must sign off on the accounts before they can be sent to Companies House.
These must include:
These accounts must also be shared with all shareholders, attendees of the company’s general meetings, Companies House and HMRC (as part of a Company Tax Return).
The accounting year runs from the last day of the month when the partnership was first incorporated. This means the financial year for a company first incorporated on the 11th May, 2023 would end on 31st May, 2024.
Limited companies have 9 months to submit their accounts to Company House following the end of their financial year.
paying tax
Unlike the other business structures, limited companies pay Corporation Tax on their profits.
When and how this corporation tax is paid depends on how much profit a company makes:
- Companies making up to £1.5 million on taxable profits must pay within 9 months and 1 day of the end of their financial year
- Companies making more than £1.5 million will pay in instalments
Corporaration Tax
The main rate of Corporation Tax for 2023/24 is 25% which is applied to businesses making more £250,000.
Companies making below £50,000 will pay the Small Profits Rate of 19%.
Companies making profits between £50,000-£250,000 will pay 19% on the first £50,000 and then 26.5% on the remaining profit. When the two figures are added together, the overall percentage will normally fall around the 24% mark.
Essentials Tip: Keep it simple
The calculation is equivalent to applying a marginal rate of 26.5% to profits between the lower and upper limits.
e.g., A company with profits of £150,000 will calculate their Corporation Tax as follows:
£50,000 at 19% = £9,500 and £100,000 at 26.5% = £26,500.
Corporation Tax will be £36,000 (equivalent to 24%)
INCOME TAX
If a shareholder also is employed by the business, they will have to pay income tax on their salary.
| Income Tax Rates & Thresholds (England, Wales and Northern Ireland) | ||
|---|---|---|
| Rate | 2021 – 2026 | |
| Personal Allowance | 0% | First £12,570 |
| Base Rate | 20% | £12,571 – £50,270 |
| Higher Rate | 40% | £50,271 – £125,140 |
| Additional Rate | 45% | Over £125,140 |
| Income Tax Rates & Thresholds (Scotland) | ||
|---|---|---|
| Rate | 2023/24 | |
| Personal Allowance | 0% | £0 – £12,570 |
| Starter Rate | 19% | £12,571 – £14,732 |
| Scottish Basic Rate | 20% | £14,733 – £25,688 |
| Intermediate Rate | 21% | £25,689 – £43,662 |
| Higher Rate | 42% | £43,663 – £125,140 |
| Top Rate | 47% | Above £125,140 |
Individuals and sole traders with earnings over £100,000 will see a reduction to their Personal Allowance by £1 for every £2 of income above the £100,000 limit. This means anyone with an income over £125,000 does not have a Personal Allowance.
DIVIDENDS
Dividends are paid to the shareholders in a company as a reward for their investment. The payments usually come from the business’ profits, with any remaining profit being re-invested into the company.
Dividend payments are treated as part of an individual’s income. Any dividends that fall within their Personal Allowance will not be taxed.
There is also a personal Dividends Allowance which is tax free. For the tax year 2023/24, this is £1000.