As a UK Company Director, it is important to have a clear understanding of your tax obligations. In this article, we will explore the various tax requirements that you need to be aware of and fulfil. From understanding the different types of taxes you are liable to pay to knowing the deadlines and procedures involved, this article aims to provide you with a comprehensive overview of the tax obligations that come with being a company director in the UK. So, let’s dive into the world of taxes and equip you with the knowledge needed to navigate this aspect of your role with confidence.
Income Tax
Taxable income
As a UK company director, you are liable to pay income tax on the money you earn from your company. This includes your salary and any dividends you receive. It is important to understand what qualifies as taxable income to ensure you meet your obligations.
Personal allowance
The personal allowance is the amount of income you can earn before you start paying income tax. For the 2024/2025 tax year, the personal allowance is £12,570. This means that if your total income is below this threshold, you will not have to pay any income tax.
Income tax rates
Once your income exceeds the personal allowance, you will be subject to income tax at various rates depending on the amount you earn. The rates for the 2024/2025 tax year are as follows:
- Basic rate: 20% on income between £12,571 and £50,270
- Higher rate: 40% on income between £50,271 and £125,140
- Additional rate: 45% on income above £125,140
Dividends
In addition to your salary, as a company director, you may receive dividends from your company. Dividends are taxed separately from your salary and have different tax rates. The tax rates for dividends are as follows:
- Dividend allowance: £500, no tax is due on dividends within this allowance
- Basic rate: 8.75% on dividends above the allowance and up to the basic rate band
- Higher rate: 33.75% on dividends above the basic rate band and up to the higher rate band
- Additional rate: 39.35% on dividends above the higher rate band
Self-assessment
To report your income and calculate the amount of tax you owe, you will need to complete a self-assessment tax return. This process allows you to declare your income, claim any deductions or allowances you are entitled to, and calculate your tax liability. It is important to ensure that your self-assessment is accurate and submitted on time to avoid any penalties.
Tax codes
Your tax code is used by your employer or your pension provider to determine how much tax should be deducted from your income. It is important to understand your tax code and ensure that it is correct. Your tax code takes into account your personal allowance and any other factors that may affect your tax liability.
Taxable benefits
In addition to your salary and dividends, you may receive taxable benefits from your company. These benefits are considered part of your income and are subject to income tax. Examples of taxable benefits include company cars, private medical insurance, and low-interest loans. It is important to report these benefits correctly on your tax return to avoid any penalties.
National Insurance Contributions
Class 1 NICs
National Insurance Contributions (NICs) are payments made by individuals to fund various state benefits, such as the State Pension and the National Health Service (NHS). Class 1 NICs are paid by employees and employers based on the earnings of the employee.
As a company director, you will be liable to pay primary Class 1 NICs on your salary. The rate of primary Class 1 NICs for the 2024/2025 tax year is currently set at 8% on earnings between £242 and £967 per week, and 2% on earnings above £967 per week.
Capital Gains Tax
Types of capital gains
Capital gains tax is a tax on the profit you make when you sell or dispose of an asset that has increased in value. As a company director, you may be subject to capital gains tax if you sell company shares or other assets personally. There are two types of capital gains: residential property gains and other gains. Residential property gains are subject to different tax rates and rules compared to other gains.
Gains and losses
Capital gains tax is calculated by subtracting the cost of acquiring and improving the asset (the base cost) from the proceeds of the sale. If the result is a positive figure, it represents a gain, and if it is negative, it represents a loss. It is important to keep accurate records of the acquisition and disposal of assets to ensure the correct calculation of gains or losses.
Annual exemption
Every individual is entitled to an annual capital gains tax exemption, which means that you can make a certain amount of gains each tax year without having to pay capital gains tax. For the 2024/2025 tax year, the annual exemption is £3,000. It is important to keep track of your gains and losses to ensure you stay within the annual exemption limit.
Capital gains tax rates
The rate of capital gains tax you will pay depends on your total taxable income and the type of asset being disposed of. For residential property gains, the rates are 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers. For other gains, the rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers.
Reporting and paying
If you have made capital gains during the tax year that exceed the annual exemption, you will need to report and pay capital gains tax. This is usually done by completing a self-assessment tax return and paying the tax liability by the deadline. It is important to ensure that your capital gains tax liability is reported accurately and paid on time to avoid any penalties.
Entrepreneurs’ Relief
Entrepreneurs’ Relief is a tax relief that can significantly reduce the amount of capital gains tax you pay when selling or disposing of certain business assets. If you qualify for Entrepreneurs’ Relief, the rate of capital gains tax is reduced to 10% on eligible gains, up to a lifetime limit of £1 million. It is worth exploring whether you meet the conditions for Entrepreneurs’ Relief to benefit from this tax relief.
Inheritance tax and gifts
It is worth noting that when considering capital gains tax, you may also need to consider the potential impact on inheritance tax. If you gift or sell assets to another individual, there may be inheritance tax implications depending on the timing and circumstances. It is advisable to seek professional advice to understand the potential tax implications of gifts and transfers.
Pension Contributions
Tax relief on contributions
As a company director, you can benefit from tax relief on pension contributions. This means that the amount you contribute to your pension can be deducted from your taxable income, reducing your overall tax liability. The tax relief is available at the highest rate of income tax you pay. It is important to keep track of your pension contributions and ensure you claim the appropriate tax relief.