Unlike employees of a company, directors are required to file self-assessment tax returns to calculate and pay any income tax and national insurance contributions they owe. Company directors must register with HMRC for Self-Assessment before they can send their tax returns. When you are employed by a company your employer provides the information to HMRC. The tax and national insurance contributions are calculated and deducted prior to you receiving your salary.
When you are a director the calculation of tax can be quite different. A private limited company provides a more flexible structure which can allow the Income Tax and NIC liabilities of its directors to be reduced. This is one of the significant benefits compared to a sole trader structure. The fact that limited companies can be owned and managed by just one person means an individual can receive a salary as a director, and dividend payments as a shareholder. This can result in tax savings for both the company and the individual.
In simple terms the current tax structure allows an individual to receive the first £11,500 of their income tax-free under their personal tax allowance (2017-2018). They can then receive a further £5,000 dividend payment tax-free. It is important to note that these benefits have changed somewhat in recent years and generally change with different governments. We would always advise seeking professional guidance from a qualified accountant if you are unsure which will be more beneficial for you.
When to register for Self-Assessment
Registration for self-assessment tax filing can be completed online and must happen by no later than 6th October after the end of the first tax year in which you became a director or the company was formed. The current tax year runs from April 6th 2017 – April 5th 2018, so if your company was registered this year or you are a newly appointed director you registration deadline would be October 5th 2018.
You should usually receive your personal Unique Taxpayer Reference (UTR) number from HMRC after a few days (this is different to your companies UTR). This is used to access HRMC’s online services, submit your tax returns, and pay Income Tax and NICs. Filing your tax return online is the quickest and most popular option. When filing your tax return you must declare all income received from your company or by other means. An accountant will be able to provide guidance and even assist with filing your tax return online.
This article is provided for information only and is not tax advice. Your personal circumstances must be taken into account when extracting funds from a company. We advise contacting an accountant for professional advice.