VAT Cash Accounting Scheme
James Trowell
Accounting Lead
Posted 2 months ago

Limited company tax rates 2020/21

Being the owner of a limited company comes with certain financial responsibilities; registering to pay tax on your company income and ensuring that any liabilities are paid to HMRC on time.

We’re going to take a look at the various taxes you will be liable to pay as a limited company, and when you have to pay them. In this article we’re going to cover company taxes and personal taxes.

Corporation Tax

Let’s start with Corporation tax as it’s the simplest.

Corporation tax is paid on your limited company profits. It’s just one flat rate that applies to every company, of all sizes.

It doesn’t include a tax-free allowance and doesn’t vary depending on how much you earn.

The government originally planned to reduce the rate to 17% for the 20/21 tax year, however this has been scrapped and remains at 19% for the 20/21 tax year.

VAT

Once the annual revenue of your company reaches £85,000 within a one year period you will need to register for Value Added Tax (VAT), a tax paid on most goods and services.

Once you’ve registered you will need to start charging VAT on your sales, but you can also can reclaim VAT on purchases.

This needs a bit of thought because you have to decide whether to increase your price to charge the VAT onto your customers, or keep the prices the same and pay the VAT yourself – reducing your profits. If your customers are businesses and mainly VAT registered it’s easier to charge VAT on because they are likely to be able to claim it back. However, if your customers are not businesses and aren’t VAT registered, the increase in price could have a negative impact your sales.

Managing VAT is where it can start to get slightly complicated as there are a few different rates and VAT schemes to be aware of. It requires careful record-keeping of all transactions and the rate of VAT they were charged at.

Starting with the standard VAT rates, outlined below.

VAT Type

Rate

Standard – applicable to most goods and services

20%

Reduced rate – a lower rate applicable to certain goods and services

5%

Zero rate – applied to specific goods and services such as food, books, newspapers, children’s clothes

0%

You can see a full list of VAT rates on different goods and services here.

Then there is the Flat Rate Scheme, which works slightly differently to the standard VAT scheme. Instead of paying VAT on your sales and then reclaiming it on your expenses, you pay a fixed percentage on your gross sales (sales inclusive of VAT) based on the sector you work in.

The caveat to this is that under the Flat Rate Scheme you can’t reclaim the VAT on your expenses except for certain capital expenditure of goods over £2,000 (inclusive of VAT).

It’s also worth checking if you are a limited cost business. If so, a flat rate on income will be applied at 16.5% instead of the rate being dependant on your business sector.

To enrol on the flat rate scheme your anticipated revenue must be £150,000 or less. If your annual turnover exceeds £230,000 (inclusive of VAT) you will have to move to the standard accounting scheme.

Employer National Insurance rates

If your company is taking on members of staff, it’s important to remember that as an employer you have certain obligations. You are responsible for deducting income tax and National Insurance from your employee’s wages and paying the amounts deducted to HMRC each month.

This table shows how much employers pay towards employees’ National Insurance for the 2020 to 2021 tax year.

Annual Salary

Employer’s NI Payable

Below £9,500

No National Insurance is payable

£9,501 – £50,000

13.8%

Over £50,000

13.8%

Now we’ve covered company taxes, so now we’re going to look at the personal taxes that may apply to you as the director of a limited company.

Split across three key areas: income tax, national insurance and dividends.

Income tax (For Directors And Employees)

You may decide to take a salary out of the company, or perhaps you have employees on the payroll. In both cases you will need to consider income tax and make sure you are registered for payroll.

If you don’t already have an accountant, we’d recommend that you chat to one about how to structure your tax to make sure you pay the correct amount, and to get help setting up and running payroll each month.

Personal Allowance

Every individual has a personal allowance on income that resets each tax year. This is the amount of income you can earn tax free, and it changes based on the amount of income you earn as shown below.

Last tax year this increased from £11,850 to £12,500, and it remains at this level for 2020/21.

Income Bracket Personal Allowance
£0 – £100,000 £12,500
£100,001 – £125,000 Your personal allowance will decrease by £1
for every £2 of income over £100,000
Over £125,000 £0

Income Tax Rates 20/21

If you’re running a payroll scheme through your company, your employees will be subject to income tax rates based on the salary level run weekly or monthly.

For the 20/21 tax year, if you are based in England, Wales or Northern Ireland, all income that you or any other employees earn over and above your personal allowance will be taxed as follows:

Tax Bracket Rate
Earnings below personal allowance
(£12,500)
No income tax payable
Basic rate (£12,501 – £50,000) 20%
Higher rate (£50,001- £150,000) 40%
Additional rate (Over £150,000) 45%

If you live in Scotland, different income tax rates apply, as shown below:

Tax Bands Rate
Earnings below personal allowance
(£12,500)
No income tax payable
Starter rate (£12,501- £14,585) 19%
Basic rate (£14,586 to £25,158) 20%
Intermediate rate (£25,159 to £43,430) 21%
Higher rate (£43,430 to £150,000) 41%
Additional rate (Over £150,000) 46%

National Insurance Rates 20/21

In addition to income tax, if you pay yourself (or any employees) a salary through your limited company, you may be subject to pay employee’s national insurance. The rates for this year are set out below.

Employee NI rates

Annual Salary Class 1 Payable
Below £9,500 No National Insurance is payable
£9,501 – £50,000 12%
Over £50,000 2%

Dividend Tax Rates 20/21

Last but not least, you may also choose to remunerate yourself in the form of dividends. A dividend is a share of the company’s profits, paid to its shareholders. ‘Shareholder’ is the legal term for a person who owns all or part of a company, which in this case is you.

The first £2,000 is tax free, from that point forward the rates below will apply:

Tax Bracket Dividend Rate
Basic rate 7.5%
Higher Rate 32.5%
Additional Rate 38.1%

And there it is.

Need some guidance?

We’d always recommend talking to an accountant to make sure you’re paying the correct amount of tax. They will be able to advise on your specific situation and with a view on what’s best for your business.

If you already have one, you can share access to your Coconut account with them through the Coconut Accountant Portal. But if don’t yet have one, you can speak with one through our Integrated Accounting Partners. Book a call with our team today at a time that suits you.

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