05: Tax and National Insurance

In practice, Companies House automatically tells HM Revenue & Customs (HMRC) when a company has been formed, but if you trade through an existing limited company you will need to inform HMRC that your company has started to trade and is liable for corporation tax. Failure to do this could result in you incurring a financial penalty.

All companies pay corporation tax on company profits – and must make an annual return to HMRC – but corporation tax is generally lower than income tax. Small companies must pay corporation tax nine months and one day after the end of their accounting periods. Large companies with profits of over £1.5 million must pay corporation tax by instalments, starting six months into the accounting period.

Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business to be used as working capital. As company directors are employees of the company, they must pay Class 1 National Insurance as well as income tax on their salaries.

For 2007/08, the threshold at which you need to register a company for VAT is £64,000.