UK Trading Companies

UK companies can be used for a variety of trading and investment activities. In recent years companies have become a popular vehicle through which to conduct business, particular for the tax advantages that they offer. Companies are generally taxed at significantly lower rates than individuals and partnerships. In addition, the shareholders of a UK limited company benefit from limited liability status.

Basis of Taxation

The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustments required or authorised by tax law in calculating profits for corporation tax purposes. The basis of taxation of UK trading companies is set out below:

Corporation tax UK trading companies are subject to corporation tax at the following rates on both income profits and capital gains:

20% Small profits rate for profits up to £300,000

23% Main rate of tax for profits over £1,500,000

23.75% Marginal rate of tax for profits between £300,001 and £1,500,000

From 1 April 2014 the main rate of corporation tax will be reduced to 21% and from 1 April 2015 will further reduce to a single rate of 20%.

Trading losses Trading losses may be:

Carried forward indefinitely and set off against subsequent profits of the same trade; and/or Set off against other income of the company of the same or preceding accounting year and against capital gains of those years. Profit Extraction

Planning should be undertaken on an annual basis to ensure that the optimum overall tax position is achieved for both company and shareholder. The most common methods of extracting profits from a company are:

Remuneration (e.g. salaries and bonuses) Although these payments are an allowable deduction against the company's taxable profits, they are taxed by HMRC as employment income in the hands of the employee or Director. Therefore, a taxpayer in receipt of these payments is liable to income tax at their marginal rate (see below).

Tax on employment income:

In addition to suffering income tax, national insurance contributions (NICs) will also be payable. Individuals suffer class 1 NICs at a rate of 12% on employment income between £7,748 and £41,444; and 2% on earnings above £41,444. The company will also have to pay 13.8% on any gross salaries above £7,696.

As an employer, the company has a responsibility to register with HMRC and to deduct PAYE (Pay As You Earn) and NICs from payments made to employees and account for these deductions to...