Is there a minimum limit where a limited company can pay zero corporation tax?

Question

I am self-employed, I have a limited company, there is only myself in the company.

Last year I only earned just over £5,000, I have just received the final accounts from my accountant saying I need to pay almost £450 in corporation tax liability.

Is this right? I know there is a value of £10,600 you can earn before you need to pay tax on a personal income. Is there no equivalent for corporation tax? I don't understand the accounts he has sent me (this is why I employ an accountant). Is there possibly a way this could be avoided, or is this reasonable?

I'm just a little peeved, I'm also being charged £600 by my accountant, so in total I've lost 20% from an already low income.

Answer 1

Your tax rate is 20% for turnover below £300000. So deducting your expenses and all the tax your accountant thinks you need to pay is £450. But you can claim relief on your tax payments. Visit the UK gov website to check your options under which you can claim relief.

Frankly speaking for such a low turnover you shouldn't have opened a limited company. Or do you expect your turnover to increase in the coming years ? If your turnover isn't going to increase any further or if there isn't going to be a substantial increase, better to go as a sole trader or an umbrella company.

Answer 2

There are two totally different things: There is your limited company, and there is yourself.

Your limited company will absolutely have to pay 20% corporation tax on all its profits. The profits are the income of the limited company (you say it's £5,000 a year) minus all expenses. Usually you would pay yourself a salary, which immediately reduces your profits. And of course the payment to the accountant will reduce the profits.

If the limited company is your only source of income, the usual method is to pay yourself £10,600 salary a year, possible pay money into a pension for yourself which is tax free and reduces the company's profits, pay 20% corporation on the rest, and pay yourself a dividend twice a year. Unless you have another job where you make a lot of money, you should have paid all that money to yourself as income and paid zero corporation tax.

And may I say that if you made £5,000 a year, then there is most likely not enough going on to justify that an accountant charges you £600. You should be able to find someone doing it cheaper; I cannot imagine that he or she had to do a lot of work for this.