Business Tax: A Beginner’s Guide
All businesses which operate in the UK must pay taxes. There are various forms to pay, and some depend on the structure of your business.
Limited companies and sole traders are both taxed differently. The most important thing to remember is that with the former, the personal finances of those involved are treated separately to the financial obligations of the business. With the latter, the sole trader (or partnership members) are taxed as one single entity.
All taxes are paid to HM Revenue and Customs (HMRC). If you are a startup, once you have decided on the structure, it is essential to be aware of the charges you are now obliged to pay. Whichever you take, records must be kept of all accounts.
As the owner of a limited company, you are responsible for registering to pay tax on your company income and any other financial obligations, as well as completing your personal self assessment tax returns.
Charged on the annual profits of the business (income minus allowable expenses). It is a flat rate, currently 19%, so not dependent on your profit bracket, and there are no allowances.
A CT600 form which includes company details, your tax reference number, the tax calculation and any allowances must be completed and filed with HMRC online.
If your turnover is over £85,000, you must register to pay VAT. If it is under this, you can still register voluntarily, which may be beneficial if you sell to other registered businesses and want to claim back the VAT.
You essentially collect this money from your customers and hold it until it is passed over to HMRC. The current rate is 20%.
PAYE/National Insurance Contributions
Directors must set up PAYE to transfer their independent salary from business accounts to personal accounts. Because the company and directors are seen as two separate entities, money can’t just be taken out of business accounts. It must also be in place if you have any employees who are paid a wage.
From this data, income tax, NI contributions and other payments such as pensions/student loans can be worked out and paid. NI contributions begin once over £8,424 is being earned in wages and bonuses. Using online payroll software is the easiest way to monitor and keep on track of this.
Sole Traders (and Self Employed)
Sole traders run businesses independently and are therefore technically self-employed. Self assessment returns take care of most of the tax you have to pay.
You can keep all of your annual income after tax has been paid on it. This also means that you are personally responsible for your business’ finances (and any debts).
Anybody who earns over £1,000 from self-employment must register as a sole trader.
Declared through a Self Assessment Tax return. All individuals must pay income tax, based on earnings. Sole trader income is taxed the same way as any other income by HMRC. You will get a certain amount as ‘personal allowance’, and then the rate you pay will be based on which tax rate band you fall into.
Personal allowance for 2018/19 is up to £11,850. There is then Basic rate (£11,851 to £46,350 at 20%), Higher rate ( £46,351 to £150,000 at 40%) and Additional rate (over £150,000 at 45%).
National Insurance Contributions
Also declared through Self Assessment. The amount you pay will depend on your income. There are Class 2 and Class 4 contributions. The former stands at £2.95 per week for the 2018/19 Tax Year, and the latter will be worked out by HMRC.
Class 4 is charged at 9% on earnings between £8,424 and £46,350, and 2% on anything over this.
Just as with limited companies, if your income is above £85,000, you must pay VAT on the services you have offered.
You can also voluntarily register at any time, which will allow you to claim back the VAT you have paid on business costs.