Self Assessment for directors is required by HMRC. This means directors have to file their own tax returns and pay Income Tax and National Insurance Contributions on all taxable income above their Personal tax-free Allowance of £12,500 (2020-21 tax year).
However, the flexible structure of a private limited company allows directors to reduce their Income Tax and NIC liabilities, which is one of the significant benefits of running a business as a limited company instead of a sole trader structure.
Because limited companies can be owned and managed by just one person, an individual may register for Self Assessment and receive a salary as a director and dividend payments as a shareholder.
This results in tax savings for both the company and the individual, particularly if the director’s salary is kept below the NIC primary threshold of £9,504/year (2020-21), with the remaining income paid as dividends. No Income Tax or Class National Insurance will be due on the salary.
How to register a director for Self Assessment
Company directors must register with HMRC for Self Assessment before they can send their tax returns. This should be done as soon as possible after company formation or being appointed to an existing limited company.
The deadline for registering for the current 2020-21 tax year, which runs from April 6th 2020 to April 5th 2021, is October 5th 2021. This can be done online. You will need to provide your personal details, National Insurance Number, and the date of your appointment as director.
Within a few days of registration, you should receive your personal Unique Taxpayer Reference (UTR) number from HMRC. You will need this to sign into HRMC’s online services, send your tax returns, and pay Income Tax and NICs. Please note: a personal UTR is not the same as a Company UTR.
How and when to file a Self Assessment tax return
The most popular and convenient option is to file an online tax return. Income from all sources and capital gains, whether received from the company or elsewhere, must be declared on the tax return. You must also complete a tax return even if you don’t have any tax to pay. If your accounting records and tax returns are complex, it may be worth appointing an accountant.
Self Assessment deadlines:
- Paper tax returns must be filed by midnight 31st October after the end of the most recent tax year. For example: the deadline for filing paper returns for the 2020-21 tax year that ends on 5th April 2021 is 31st October 2021.
- Online tax returns must be filed by 31st January the following year. For example: the deadline for filing online returns for the 2020-21 tax year is 31st January 2022.
- Final payment of Income tax and NI (class 2 and class 4) for the 2020-21 tax year must be paid by midnight 31st January 2022.
HMRC will send a letter to your service address around April/May to remind you to prepare a tax return.
How much National Insurance do I pay through Self Assessment?
You will pay Class 2 and Class 4 National Insurance through Self Assessment at the following rates in the following circumstances:
- Class 2 NI of £3.05/week is payable when your annual income exceeds £6,475.
- Class 4 NI is charged at 9% on annual earnings between £9,500-£50,000.
- Income exceeding £50,000 is liable for an additional 2% Class 4 NI.
Class 2 can be paid on a regular basis or twice per year but you have to arrange this yourself. Class 4 contributions must be paid with your final Income Tax payment by 31st January.
Late filing penalties
If you miss the October deadline, you can file your tax return online instead. HMRC may impose penalties if your tax return is delivered after the online deadline and/or you pay your tax bill and NI after the deadline.
If your tax return is up to 3 months late, you can be fined £100. This will increase if it is filed even later. You may also be charged penalties and/or interest if some or all of your tax bill is paid late. This is worked out as a percentage of the total outstanding tax payment.
How to account for an overdrawn director’s loan through Self Assessment
There may be tax implications for a director and a company if a director’s loan account is overdrawn 9 months after the end of the company’s financial year. The company may have to include details of any directors’ loans in its Company Tax Return and pay tax under Section 455 of the Corporation Tax Act 2010. A director may have to include details of any loan in his or her Self Assessment tax return.
A company director must report any such loan on his or her Self Assessment tax return in the following circumstances:
- The director owes the company more than £10,000 at any time during the year.
- The director pays the company interest on a loan below the official rate of interest.
- The director does not need to repay the loan because it is ‘written off’ or ‘released’ by the company.
- The director charges the company interest on a loan. This is classed as personal income.
In addition to reporting a director’s loan and/or interest payments through Self Assessment, directors may have to pay Income Tax and National Insurance Contributions on any overdrawn loan amount, any interest earned on a loan made to the company, and any loan that is written off by the company. In each of these cases, the director is earning a form of taxable income.