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Tax penalties for limited companies and how to avoid them

Tax penalties for limited companies and how to avoid them
Essential tax compliance for limited companies

Tax penalties for limited companies and how to avoid them

Penalties for late payment

Late payments of taxes incur interest charges at a rate of 7.75%. This applies to various taxes, including corporation tax and income tax. So it’s worth avoiding, not least because of the dent in your cash. No one wants a penalty so let’s help you get it right!

A little note – All companies, including dormant and non-trading entities, are required to submit a confirmation statement at least once a year. This ensures the accuracy of the information that HMRC and Companies House have on record for your company is correct.

Although there is no penalty for late filing, it is mandatory to submit a confirmation statement even if there have been no changes to your company during the review period.

Additionally, you must declare that the planned future activities of the company are lawful. This requirement is applicable to all confirmation statements dated 5 March 2024 onwards.

 

Top Tips to avoid penalties.

Avoiding penalties and ensuring compliance is not just about adhering to deadlines; it involves strategic planning and best practices. Here’s a few top tips:

  1. Accurate record-keeping

Maintaining detailed and accurate financial records is more than a procedural task – it is the backbone of financial responsibility and regulatory compliance for any entity. This record-keeping ensures that financial statements and tax returns are prepared with precision, minimising the risk of inaccuracies that could potentially result in penalties or HMRC compliance enquiries.

  1. Never underestimate the importance of a good bookkeeper

Good attention to financial documentation offers invaluable insights into the business’s financial health, enabling informed decision-making. It also simplifies the process of identifying and putting right discrepancies early.

Get a good bookkeeper and make sure they are licensed and regulated for Anti-Money Laundering – it’s the law, so don’t use an unregistered bookkeeper. If you directly employ a bookkeeper make sure they are trained. Your bookkeeper will know your deadlines and compliance obligations.

  1. Save cash for tax obligations!

Setting aside funds for tax liabilities as they accrue throughout the financial year is a good idea and a must. This methodical approach eliminates the last-minute rush to gather sufficient funds for tax payments, thereby reducing stress and the risk of incurring penalties for late payments.

Additionally, by allocating funds for taxes in advance, individuals and businesses can improve their cashflow management, allowing for a more stable financial outlook.

  1. Use accounting technology – Digital First

The Making Tax Digital (MTD) initiative by HMRC represents a transformative approach to tax filing, mandating a digital-first approach.

Bookkeeping software solutions such as QuickBooks, Xero and Sage are designed to integrate seamlessly with HMRC’s systems, automating the submission of VAT and PAYE returns directly from the software.  Digital accounting helps businesses adhere to regulatory requirements while enhancing their operational efficiency and financial transparency. It will bring peace of mind and you accountants can access your software remotely, saving time and  making your like easier.

  1. Addressing penalties

When companies face penalties for late tax filings or payments, the option to appeal provides a recourse if they can present a valid reason for the delay, such as severe illness or unexpected technical disruptions. But be aware a good accountant will apply for a filing extension if you let them know about illness, bereavement or real technology issues.

Successful appeals hinge on the ability to conclusively demonstrate that the company took all reasonable steps to meet its tax obligations, despite the challenges faced.

Get help

Regular conversations with your accountant are often really helpful for maintaining compliance. Seeking professional help not only facilitates adherence to statutory deadlines but can also enhance your operational efficiency and financial health.

If you need help get in touch with us.

 

Tax deadlines – Essential tax compliance for limited companies

tax compliance for limited companies
Essential tax compliance for limited companies

Managing a limited company requires meticulous attention to regulatory obligations, particularly with regard to tax and accounting. Financial compliance is a series of key deadlines and potential penalties for non-compliance, demanding a proactive and informed approach from company directors.

Here are some of the key deadline you’ll come across as a Director;

Initial setup

 Filing the first accounts with Companies House

The journey of compliance begins shortly after the incorporation of your company. Your first significant deadline is the submission of your initial set of accounts to Companies House, due 21 months from the date of registration.

This extended deadline for the first submission recognises the challenges new businesses face in establishing their operations and sets the stage for regular annual reporting thereafter.

Annual obligations

  •  Annual accounts submission

After the initial submission, your company is required to file annual accounts within nine months following the end of its financial year. These accounts must provide a transparent overview of the company’s financial performance and position, including the profit and loss statement, balance sheet, director’s report and, depending on the company’s size, an auditor’s report.

This documentation ensures stakeholders, including shareholders, creditors and regulatory bodies, have access to accurate information about the company’s financial health.

  • Corporation tax obligations

Parallel to filing annual accounts is the obligation to address corporation tax. Companies must calculate and pay this tax nine months and one day after the conclusion of their financial year. Importantly, this responsibility includes informing HMRC if the company believes it is not liable for any corporation tax, thus avoiding penalties for presumed non-payment.

  • Company tax return

A critical component of tax compliance is the filing of the company tax return with HMRC, which is due 12 months after the end of the accounting period for corporation tax.

This return is comprehensive, detailing the company’s tax liability based on its annual financial report and calculations. It’s a fundamental process for declaring tax obligations to HMRC and requires precision and thoroughness.

Understanding some of the penalties for non-compliance

 Penalties for late filing

The consequences of missing filing deadlines are significant and tiered based on the delay.

For corporation tax, the following applies:

  • 1 day late: £100
  • 3 months: Another £100
  • 6 months: HMRC will estimate your Corporation Tax bill and add a penalty of 10% the unpaid tax
  • 12 months: Another 10% of any unpaid tax

For statutory accounts with Companies House, the following applies:

  • Not more than 1 month: £150 for a private company or LLP (£750 for a public company)
  • More than 1 month but not more than 3 months: £375 for a private company or LLP (£1,500 for a public company)
  • More than 3 months but not more than 6 months: £750 for a private company or LLP (£3,000 for a public company)
  • More than 6 months: £1,500 for a private company or LLP (£7,500 for a public company)

Make sure you and your bookkeeping staff know your key dates and deadlines.

 

Personal tax planning in 2024/2025

As we step into the 2024/25 tax year, it’s now more important than ever to take a proactive approach to managing your personal finances.

Personal Tax planning 24/25
Tax planning 24/25

Whether you’re navigating the complexities of income tax, considering investment opportunities or planning for your future, understanding the nuances of the UK tax system can help you make informed decisions.

This guide is crafted with you in mind, offering clarity and actionable advice to help you optimise your tax position and secure your financial wellbeing.

Understanding your tax obligations

The foundation of effective tax planning is a solid understanding of your tax obligations. The UK tax system may seem daunting at first glance, but once you grasp the basics, you’ll be better positioned to identify saving opportunities.

Income tax: Know your rates and allowances

Income tax is charged on various forms of income, including wages, pensions and savings interest, but everyone is entitled to a personal allowance — the amount you can earn before you start paying income tax. Be aware, however, that those earning above £100,000 have a reduced personal allowance.

For the 2024/25 tax year, this allowance remains at £12,570. Beyond this, tax bands are applied progressively, meaning the more you earn, the higher the rate of tax you will pay on your income over the allowance.

  • Basic rate (20%) applies to income over £12,570 up to £50,270.
  • Higher rate (40%) is charged on income between £50,271 and £125,140.
  • Additional rate (45%) affects income above £125,140.

Understanding which tax bracket you fall into is the first step in identifying how to manage your tax liabilities effectively.

Personal Savings Allowance and Dividend Allowance

For savers and investors, the Personal Savings Allowance (PSA) and Dividend Allowance present opportunities to earn income with favourable tax treatment. The PSA allows basic rate taxpayers to earn up to £1,000 in savings interest without paying tax, which decreases to £500 for higher-rate taxpayers. The Dividend Allowance permits £500 of dividend income to be received tax-free, regardless of your income tax band.

Marriage allowance

Married couples and those in civil partnerships could be eligible to apply for the marriage allowance. Those whose earnings are too low to fully utilise their personal allowance have the option to transfer this unused portion to their spouse or civil partner, up to a certain limit. This benefit cannot be accessed if the receiving spouse or partner is a higher or additional rate tax payer.

For the 2024/25 tax year, the highest amount that can be transferred stands at £1,260.

Maximising your allowances

One of the simplest yet most effective tax planning strategies is to ensure you’re fully utilising your available allowances.

ISAs: A tax-efficient haven for your savings

Individual savings accounts (ISAs) remain a cornerstone of personal tax planning. With a generous annual allowance of £20,000 for the 2024/25 tax year, ISAs offer a tax-efficient shelter for your savings and investments, with no tax on interest, dividends or capital gains. Whether you opt for a cash ISA, stocks and shares ISA, or the innovative lifetime ISA, making the most of this allowance can significantly enhance your wealth, tax-free.

In the Spring Budget 2024, the Government announced the introduction of the UK ISA. The new £5,000 allowance, in addition to the existing ISA allowance, will provide a new tax-free savings opportunity for people to invest in the UK, while supporting UK companies.

Pension contributions: Investing in your future

Contributing to a pension not only secures your future but also offers immediate tax relief. Contributions are topped up by the government at your highest rate of income tax, making them one of the most tax-efficient forms of saving. For the 2024/25 tax year, the annual allowance for pension contributions increases to £60,000, or 100% of your earnings, whichever is lower. Utilising this allowance can reduce your taxable income and the amount of tax you owe; the allowance can also be tapered down for high earners.

Planning for capital gains

Capital gains tax (CGT) is levied on the profit made when you sell or ‘dispose of’ an asset that has appreciated in value. It is important to note that it is the profit or ‘gain’ from the sale that is subject to taxation, rather than the total amount of money received from the sale. The essence of CGT is to tax the increase in value of an asset from the time it was acquired to the time it is sold, covering a wide range of assets including property, stocks and shares, among others.

For the fiscal year 2024/25, there is an annual exempt amount set at £3,000. This exemption allows individuals to realise gains of up to this limit without the need to pay any CGT. This threshold provides a strategic opportunity for taxpayers to manage their assets in a tax efficient manner. By planning the sale of assets, such as real estate, stocks or collectables, individuals can ensure that their gains do not exceed the exempt amount in any given tax year, thereby avoiding CGT on those gains.

Strategic planning can involve timing the sale of assets to take full advantage of the annual exemption. For instance, if an individual anticipates a gain that would exceed the exemption limit, they might consider spreading the disposal of assets over multiple tax years. This approach allows for the utilisation of the annual exempt amount in each year, potentially reducing the overall tax liability.

Inheritance tax planning: Safeguarding your legacy

Inheritance tax (IHT) planning is a crucial aspect of long-term financial planning. With the IHT threshold frozen at £325,000, any estate valued above this amount could be subject to a 40% tax rate on the excess.

However, strategies such as gifting, placing assets into trust or investing in IHT-efficient investments can mitigate potential tax liabilities and protect your estate for future generations.

Contact your accountant or financial advisor to discuss the additional exempt amount for residential properties, in addition to the standard £325,000, as the vast majority of people with inheritance tax liabilities will also have a residential property.

Navigating changes and seeking professional advice

The tax landscape is ever-evolving, with changes introduced in each Budget affecting allowances, rates and reliefs. Keeping up to date with these changes is vital for effective tax planning. However, the complexity of tax legislation means that personalised advice from a tax professional can be invaluable. A tailored approach, considering your unique circumstances and goals, can help maximise your tax-efficiency and financial wellbeing.

As we navigate the 2024/25 tax year, remember that effective tax planning is a continuous process, not a once-a-year task. By understanding your obligations, utilising available allowances and reliefs, and seeking professional advice, you can take control of your financial future with confidence.

Here are a few ways an accountant can help you.

  • Identifying opportunities for tax savings: An accountant can review your financial situation to identify any opportunities to save on taxes. This could include making use of all available allowances, deductions and reliefs that you may not be aware of.
  • Staying compliant: With tax laws constantly changing, an accountant ensures that you remain compliant, avoiding penalties and fines. This involves not just understanding current laws but also keeping an eye on upcoming changes that may affect your financial planning.
  • Strategic financial planning: Accountants can assist in long-term financial planning, including retirement planning, investments and business growth strategies, ensuring that tax efficiency is considered at every step.
  • Risk management: By understanding the nuances of tax legislation, accountants can help identify potential risks to your financial health and suggest strategies to mitigate them.
  • Tailored advice for major life events: Whether you’re selling a property, starting a business or planning for retirement, an accountant can provide personalised advice to optimise your tax position during significant life events.

Talk to an expert.

Need assistance? Get in touch for advice on your personal tax planning.