Limited company tax is implemented and collected by HMRC in different ways. Direct tax regimes cover personal income tax through Pay As You Earn PAYE and/or Self-assessment, company profits via Corporation Tax and a potential combination of personal and company tax through Capital Gains.
Indirect tax regimes are implemented on goods and services through VAT and imports are subject to excise duty. There are also mandatory National Insurance Contributions (NIC) that qualify you for certain state benefits, pension and support allowance.
In this section we consider the main tax regimes you will encounter while running your own limited company: PAYE and NIC, Corporation Tax and VAT. We also consider two other areas that may have an effect on the tax position of your company, the Construction Industry Scheme (CIS) and Directors’ Fees.
Self Assessment and Capital Gains are considered in our section on Personal Tax along with Dividends, Second Shareholders, Company Benefits and many other topics. We look at ways of optimising your tax position on our Tax Planning page.
PAYE and National Insurance
PAYE (Pay As You Earn) is the system that HMRC uses to collect Income Tax and National Insurance contributions (NICs) from employees. This includes directors of limited companies. PAYE is applied to all the payments that an employee receives as a result of working for an employer.
Most people who work pay National Insurance contributions (NICs). The type, or class, you pay depends on your employment status. National Insurance is a tax on earnings and self-employed profits. Paying it entitles you to certain state benefits, though these vary according to whether you're employed, self-employed or making voluntary contributions. Full state pension is only paid to those who have an adequate contributions record.
Your company has to deduct tax and NICs from your income each pay period and pay Employer's Class 1 NICs if you earn above a certain threshold. These amounts are paid to HMRC monthly or quarterly. If you don't send the correct amount, or send it in late, you may be subject to penalties. After the 5th April each year, you are obliged to submit your final Employer Payment Summary by 19th April.
The new PAYE system has been in operation from April 2013. Employers and pension providers now file payroll information online to HMRC every time a payment subject to statutory deductions is made. This is referred to as Real Time Information (RTI).
HMRC may charge penalties if PAYE payments due are paid late. This includes Tax, National Insurance Contributions, Construction Industry Scheme deductions and Student Loan deductions.
How late payment penalties work
The penalties will be a percentage of the amount paid late, starting at 1% and increasing to 4% depending on the number of late payments in the year. There are also penalties of 5% if any of the PAYE due is still not paid after 6 months and again after 12 months respectively.
|No. of defaults in a tax year
||Amount to which penalty percentages apply
||Total amount that is late in the relevant tax month (ignoring the first late payment in that tax year)
|10 or more
HMRC states you will not receive a penalty if you have a reasonable explanation for being late and you paid as soon as you reasonably could after the lateness ended. You can also appeal against the penalty if you disagree with HMRC’s decision to impose it, or believe that the penalty amount is wrong.
If the payment deadline falls on a weekend or bank holiday the payment must be cleared by the last working day prior to the deadline to avoid being classed as late. If you don’t have anything to pay for a period, HMRC should be informed of this.
HMRC guidance states a reasonable explanation is likely to be something unusual, that you could not reasonably know would happen and which you could not do anything to prevent.
The inability to pay, having deliberately not paid or, reliance on someone else to make the payment for you will not count as a reasonable explanation.
Inability to pay
It is important to contact HMRC as soon as possible if you are likely to be unable to pay. Contact the HMRC’s business payment support service on 0300 200 3835. If HMRC agree a payment arrangement with you prior to the payment due date, you will not be charged any penalties for the period of the agreement.
The tax year ends on 5 April each year. Your company payroll details for each year ending 5 April must be finalised and reported to HMRC on the final submission of the Employment Payment Summary by 19th April.