Working Using a small UK Company - 101

Welcome to Working Using a Small UK Company - 101, a practical guide for directors new to managing a small business's financial and tax responsibilities. This booklet provides a clear and straightforward overview of key economic concepts, legal obligations, and standard practices to help you run your company effectively.

1. Understanding the Legal Separation

When you set up a company, it becomes a separate legal entity from its owners. As a director or shareholder, your assets are generally protected from company liabilities. However, this also means you have responsibilities to act in the company's best interest and comply with statutory duties.

2. Directors’ Responsibilities

Directors are critical in overseeing the company’s activities and ensuring its success. Key responsibilities include:

• Acting in Good Faith: Making decisions that benefit the company rather than personal interests.

• Complying with the Law: Adhering to relevant company laws and regulations, including the Companies Act 2006.

• Maintaining Accurate Records: Updating financial and statutory records and ensuring the preparation of annual accounts and reports.

• Avoiding Conflicts of Interest: Disclosing and managing any potential conflicts.

• Filing Obligations: Ensuring timely submission of filings, such as the Confirmation Statement and annual accounts, to Companies House and HMRC.

• Financial Oversight: Monitoring the company’s financial health to ensure solvency and stability.

• Duty of Care and Skill: Performing duties with reasonable care, skill, and diligence.

3. Trading as a Director-Shareholder vs. Sole Trader

Understanding how income is taxed differently in a company versus as a sole trader is essential for financial planning.

• Sole Traders: Tax is paid on all business profits through Income Tax and Class 2 and 4 National Insurance Contributions (NICs). Profits are taxed as personal income, often resulting in higher tax rates as earnings increase.

• Director-Shareholders: Taxation depends on how income is withdrawn:

• Salary: Treated as an expense for the company, reducing corporation tax but subject to Income Tax and NICs.

• Dividends: Paid from post-tax profits and subject to lower dividend tax rates, without NICs.

• Director’s Loan Account: This account allows flexibility in withdrawing funds, but it must be properly managed to avoid additional tax charges.

This structure provides tax planning opportunities, as director-shareholders can balance salary and dividends to optimize tax efficiency.

4. What Constitutes a Business Expense?

A business expense must be “wholly and exclusively” to run the company. This includes office supplies, professional services, business travel, and marketing costs. Personal or mixed-use expenses typically do not qualify.

5. Revenue vs. Capital Expenditure

• Revenue Expenditure: Day-to-day operational costs such as rent and utilities.

• Capital Expenditure: Investments in long-term assets like equipment or property are depreciated over time rather than deducted immediately.

6. Filing Annual Returns

Every company must file a Confirmation Statement annually with Companies House, ensuring that company details, including shareholders and significant controllers, are current.

7. Filing Corporation Tax Returns

Corporation tax is paid on the company’s profits, and an annual CT600 tax return must be filed with HMRC, accompanied by financial statements.

8. Corporation Tax Overview

Corporation tax applies to company profits at varying rates. Companies must calculate their tax liability, file their returns on time, and explore deductions such as capital allowances and R&D credits to reduce tax liabilities.

9. Directors’ (Shareholders’) Loan Accounts

A Directors' Loan Account (DLA) tracks any money a director takes from or lends to the company that isn’t salary, dividends, or reimbursed expenses. Overdrawn DLAs may attract tax implications and repayment requirements but allow flexibility in planning income withdrawals.

10. Payroll and Payroll Taxes

If your company has employees, you must operate PAYE (Pay As You Earn) to collect income tax and NICs. Directors receiving salaries are considered employees, and reporting must be done in real-time to HMRC. It is good to pay directors and shareholders a small wage to ensure they acquire sufficient ‘qualifying years’ for the UK state pension.

11. VAT: When and Who Should Register?

Companies must register for VAT if their taxable turnover exceeds £90,000. Voluntary registration is possible below this threshold and may be beneficial if significant VAT is incurred on purchases.

12. Dividends and Salary: Taxation Explained

Directors often take a mix of salary and dividends to optimize tax efficiency. Salaries are subject to PAYE and NICs but reduce the company's taxable profits, while dividends are taxed at lower rates and do not reduce corporation tax. This mix of dividends should be optimised to minimise your overall company and personal tax and National Insurance burden and meet the needs of each situation.

13. Benefits in Kind (P11Ds & Class 1A NIC)

Non-cash perks such as company cars or private medical insurance are benefits in kind. These must be reported via P11D forms, with Class 1A NICs payable by the company on the value of benefits.

Conclusion

Running a small UK company involves various financial and legal responsibilities. By understanding the key areas outlined in this guide, you will be better equipped to manage your company efficiently and remain compliant with UK regulations.

We'd love to hear from you if you have any questions or want to discuss your situation in more detail!