Starting and running an LTD company in the UK requires a solid understanding of accounting fundamentals. For many small business owners and new entrepreneurs, the financial terminology can seem overwhelming at first. This guide breaks down the 20 most important accounting terms you’ll encounter when managing a limited company, explaining each concept in straightforward language that doesn’t require an accounting degree to understand.
Whether you’re just setting up your private limited company or looking to better understand your existing business’s financial requirements, these key terms will help you navigate the UK’s business accounting landscape with greater confidence. From basic reporting obligations to tax considerations, we’ve covered the essential knowledge you need to ensure your LTD company remains compliant and financially healthy.
Let’s explore these crucial accounting concepts that every UK company director should understand.
1. Limited Company
A limited company is one of the most popular business structures in the UK. It exists as a separate legal entity from its owners and managers. This distinction means the company itself enters into contracts and owns assets. The key benefit of establishing an LTD company is limited liability protection. Your personal assets are generally safeguarded if the business faces financial difficulties. Your liability is limited to the amount you’ve invested or guaranteed. Limited companies often enjoy tax advantages compared to sole traders. These benefits become particularly valuable once profits exceed certain thresholds. Setting up requires a unique company name, at least one director, and proper documentation.
2. Companies House – What Every LTD Company Needs to Register
Companies House serves as the official registrar for all UK companies. It functions as a central hub where limited companies must register and file important information. Registration is a legal requirement for every private limited company in the UK.
When registering your LTD company, you’ll need to provide specific details. These include your company’s name, registered address, and director information. You must also submit shareholder details and your business activity code.
Following registration, your limited company receives a unique company number. You’ll also get a certificate of incorporation confirming its legal status. Your business must continue filing documents with Companies House throughout its lifetime. All private limited companies must submit annual accounts and a confirmation statement. Missing these deadlines can result in penalties or even company dissolution. Companies House makes your business information publicly accessible for transparency.
3. Annual Accounts
Annual accounts are financial statements that show your company’s performance over the past year. Every limited company must prepare and file these with Companies House annually.
Your LTD company’s annual accounts typically include a balance sheet and profit and loss statement. Small companies can often file simplified accounts with less detail. Micro-entities have even simpler requirements.
The filing deadline depends on your company’s financial year end. For most private limited companies, accounts must be submitted within 9 months of this date. Late filing results in automatic penalties that increase over time. These financial statements provide transparency for shareholders, HMRC, and potential investors. They offer a snapshot of your company’s financial health and performance during the accounting period.
4. Corporation Tax – How a Private Limited Company Handles Taxes
Corporation Tax is the tax a private limited company pays on its profits. Unlike individuals, companies pay this specific business tax rather than income tax.
The current main Corporation Tax rate for UK companies is 25% as of April 2023. Companies with profits under £50,000 qualify for the small profits rate of 19%. Companies with profits between £50,000 and £250,000 pay a tapered rate.
Your private limited company must register for Corporation Tax within three months of starting business activities. You’ll need to file a Company Tax Return annually, even if you made a loss or owe no tax.
The tax payment deadline is usually 9 months and 1 day after your accounting period ends. Most companies use accountants to calculate their liability correctly and identify allowable expenses.
5. VAT (Value Added Tax)
VAT is a consumption tax added to most goods and services in the UK. Limited companies must register when turnover exceeds £90,000 in 12 months.
You can register voluntarily below this threshold. This lets your LTD company reclaim VAT on purchases. You must then charge VAT on your sales.
The standard rate is 20%, with reduced rates for certain items. Your company submits VAT returns, typically quarterly. These report your sales and purchases. Making Tax Digital requires digital record-keeping for VAT-registered businesses. Most limited companies use accounting software for this. This helps maintain compliance with HMRC requirements.
6. PAYE (Pay As You Earn) – The Limited Company Payroll System
PAYE is how limited companies collect Income Tax and National Insurance. Your LTD company must register as an employer before paying staff.
You deduct tax and NI before paying salaries. These deductions go to HMRC monthly. Directors of private limited companies receiving salaries use this system.
Your company must report payroll information in real-time. This means submitting details when paying employees. Late submissions can trigger penalties.
Most limited companies use payroll software. This calculates correct deductions automatically. It also generates the required HMRC reports. This simplifies compliance for small businesses.
7. Self Assessment
Self Assessment is the system for reporting personal income to HMRC. Although limited companies file separate tax returns, company directors must also complete Self Assessment.
If you’re a director of an LTD company, you must register for Self Assessment. This is because your personal income from the company needs separate reporting. You’ll report salary, dividends, and other income here.
The deadline for online Self Assessment is January 31st each year. However, paper returns must be submitted by October 31st. Late submissions result in automatic penalties.
Many directors of private limited companies use accountants for this process. Nevertheless, you remain personally responsible for declaring all income correctly. This includes dividends from your company shares.
8. Director’s Responsibilities – What LTD Company Directors Must Know
LTD company directors have legal duties beyond managing the business. These responsibilities are defined in the Companies Act 2006. Therefore, understanding them is crucial for compliance.
Directors must promote the company’s success for shareholders’ benefit. Yet they must also consider employees, suppliers, and environmental impact. This balanced approach is legally required.
You must exercise reasonable care and skill in your role. Furthermore, you must avoid conflicts of interest and not accept benefits from third parties. These fiduciary duties protect the company’s interests.
Private limited company directors must file accounts and returns on time. Otherwise, they may face personal penalties. Additionally, directors must maintain company records and statutory registers.
9. Dividend
Dividends are payments a limited company makes to shareholders from profits. Unlike salaries, dividends aren’t subject to National Insurance contributions. Therefore, many LTD company owner-directors use them as part of tax planning.
You cannot distribute dividends if your company lacks sufficient profits. Furthermore, all dividends must be formally declared and documented. This requires proper paperwork, including dividend vouchers.
Dividend tax rates differ from income tax rates. However, you still pay personal tax on dividends above the annual allowance. This tax is declared through your Self Assessment return.
Before issuing dividends, limited companies must retain enough funds for tax liabilities. Otherwise, the company might face cash flow problems. Additionally, keeping proper records of all dividend payments is legally required.
10. Capital Allowances – How Private Limited Companies Claim Investments
Capital allowances let private limited companies deduct investment costs from taxable profits. These apply to business assets like equipment, machinery, and vehicles. Consequently, they reduce your Corporation Tax bill.
Annual Investment Allowance (AIA) currently permits 100% tax relief on qualifying expenditure. Nevertheless, this has an annual limit. Therefore, timing large purchases requires careful planning. Different assets qualify for different allowance rates. For instance, cars have specific allowances based on CO2 emissions. Meanwhile, integral building features have their own writing-down allowances.
Your private limited company can claim these allowances when filing tax returns. However, you must keep detailed records of all business asset purchases. Additionally, seeking professional advice helps maximize legitimate claims. Yes, I’m confident in both sections. The information about dividends and capital allowances is accurate for UK limited companies. Both sections use the required connecting words, maintain short sentences, and include the appropriate keywords.
11. Financial Year
A financial year is the 12-month period a company uses for accounting purposes. Limited companies can choose their own financial year. However, many align it with the tax year.
Your LTD company’s financial year determines when accounts are due. Therefore, selecting this period carefully is important. Most new companies initially have a financial year longer than 12 months. Financial years help track business performance over consistent timeframes. Consequently, you can compare results year-on-year. This provides valuable insights into your company’s growth.
All limited company transactions must be recorded within the correct financial year. Otherwise, your accounts won’t accurately reflect performance. Additionally, changing your financial year requires formal notification to Companies House.
12. Confirmation Statement – Why Limited Companies Must File One
A confirmation statement verifies your limited company’s information with Companies House. Unlike financial statements, it focuses on structural details. Therefore, every LTD company must submit one annually.
The statement confirms director details, registered office address, and share structure. Furthermore, it includes your company’s SIC codes describing business activities. Any changes must be reported correctly. Your private limited company must file this within 14 days of the review period end. However, you can submit it earlier if you prefer. The filing fee is currently £34 online or £62 by paper.
Filing the confirmation statement is legally required. Otherwise, directors may face prosecution and the company could be struck off. Nevertheless, the process is straightforward with the correct information ready.
13. Balance Sheet
A balance sheet shows what your limited company owns and owes on a specific date. It lists assets, liabilities, and shareholders’ equity. Therefore, it provides a financial snapshot of your business.
Your LTD company’s balance sheet must follow a standard format. However, small companies can file simplified versions. The document shows both current and long-term items. Assets include cash, equipment, property, and money owed to you. Meanwhile, liabilities cover loans, unpaid bills, and other debts. The difference between them is your company’s net worth.
Every limited company must prepare a balance sheet for annual accounts. Furthermore, this document requires a director’s signature. Banks and investors often examine balance sheets to assess financial health.
14. Profit and Loss Statement – How LTD Companies Report Performance
A profit and loss statement shows your LTD company’s income and expenses over time. Unlike the balance sheet, it covers a period rather than a single date. Consequently, it reveals your business performance. This statement starts with total sales or turnover. Then it deducts costs to calculate gross profit. Furthermore, it subtracts operating expenses to determine net profit or loss.
Your private limited company uses this document to track financial performance. However, it also helps identify problem areas and opportunities. HMRC uses it to verify your tax calculations. Small companies can submit abbreviated profit and loss statements to Companies House. Nevertheless, they must still prepare full versions for shareholders and HMRC. Additionally, comparing these statements year-to-year reveals important business trends.
15. Cash Flow Statement
A cash flow statement tracks money moving in and out of your limited company. Unlike profit and loss, it focuses purely on cash movements. Therefore, it helps identify potential liquidity issues. This statement divides cash activities into operating, investing, and financing categories. Consequently, you can see exactly where money comes from and goes to. This provides crucial insights for LTD company directors.
Operating cash flow shows money from day-to-day business activities. Meanwhile, investing cash flow covers asset purchases and sales. Financing cash flow includes loans, share issues, and dividend payments. Your company might be profitable on paper but face cash shortages. However, this statement helps prevent such situations. Additionally, banks often request cash flow statements when considering business loans.
16. HMRC – Private Limited Company Obligations
HMRC (Her Majesty’s Revenue and Customs) oversees tax compliance for all private limited companies. Your company must register with HMRC shortly after incorporation. Otherwise, you may face penalties for late registration. Your limited company has various HMRC obligations. These include Corporation Tax, PAYE, VAT, and potentially other taxes. Furthermore, each has specific filing and payment deadlines.
LTD companies must maintain accurate financial records for at least six years. However, some documents may need keeping longer. HMRC can request these records during tax investigations. Private limited companies face automatic penalties for late submissions or payments. Nevertheless, having systems to track deadlines helps avoid these charges. Additionally, many companies use accounting software to ensure compliance.
17. IR35
IR35 refers to tax legislation affecting limited company contractors. It determines whether contractors are genuinely self-employed or disguised employees. Therefore, understanding these rules is crucial for many LTD companies. The rules aim to prevent “off-payroll working” tax avoidance. Consequently, contractors deemed inside IR35 pay similar taxes to employees. However, they don’t receive employment benefits despite higher tax burdens.
Your limited company may need to determine IR35 status for contracts. Nevertheless, for public sector and larger private clients, the client makes this decision. This shifted responsibility affects how contracts are structured. HMRC can investigate companies suspected of IR35 non-compliance. Furthermore, they can look back several years at your arrangements. Penalties for incorrect status determination can be substantial.
18. Directors’ Loan Account – Limited Company Lending Rules
A Directors’ Loan Account tracks money moving between a director and their limited company. It records when directors borrow from or lend to the business. Consequently, proper documentation is legally required. Your LTD company must report directors’ loans exceeding £10,000 on your tax return. Furthermore, the company pays tax on loans not repaid within 9 months of the accounting year-end. This tax is currently 33.75%.
Directors can borrow from private limited companies if articles of association permit. However, certain rules must be followed to avoid tax charges. Additionally, loans to directors must be approved by shareholders. Limited companies must maintain accurate records of all director transactions. Otherwise, you risk HMRC penalties and compliance issues. Nevertheless, properly managed loan accounts can provide legitimate financial flexibility.
19. LTD company – Making Tax Digital (MTD)
Making Tax Digital is HMRC’s initiative to modernize the UK tax system. Limited companies must comply with MTD rules for VAT filing. Therefore, paper records are no longer acceptable for most businesses. Your LTD company must use compatible software to maintain digital records. Furthermore, this software must connect directly to HMRC systems. Direct manual entry on the HMRC website is not permitted.
MTD currently applies to VAT-registered businesses. However, it will eventually extend to Corporation Tax. This phased approach gives private limited companies time to prepare systems. Non-compliance with MTD requirements can result in penalties. Nevertheless, various software solutions make compliance straightforward. Additionally, proper digital records often improve financial management and decision-making.
20. Employer’s National Insurance – What LTD Companies Need to Pay
Employer’s National Insurance is a tax limited companies pay on employee earnings. Unlike employee contributions, this tax falls entirely on the employer. Therefore, it’s an important cost for LTD companies with staff. Your company pays 13.8% on employee earnings above the threshold. However, most businesses can claim Employment Allowance to reduce this bill. This can save private limited companies up to £5,000 annually.
Limited companies must calculate and pay these contributions monthly. Furthermore, they’re reported through your PAYE system. Late payments can trigger interest charges and penalties. Directors receiving salaries from their LTD company trigger Employer’s NI. Nevertheless, structuring remuneration between salary and dividends can be tax-efficient. Additionally, seeking professional advice helps optimize your approach legally.
Conclusion: Get Expert Help for Your Limited Company
Understanding these 20 key accounting terms provides a solid foundation for managing your LTD company. However, tax legislation changes regularly. Therefore, staying updated is essential for compliance. Running a private limited company brings significant responsibilities. Nevertheless, with proper knowledge and systems, these can be managed effectively. Professional guidance often pays for itself through tax efficiency and avoided penalties.
Our accounting firm specializes in supporting UK limited companies. Furthermore, we offer personalized advice tailored to your specific business needs. We can help with everything from basic compliance to strategic tax planning. We invite you to our office for a free initial consultation. During this meeting, we’ll discuss your LTD company’s specific requirements. Additionally, we can outline how our services could support your business growth. Contact us today to arrange your appointment.