If you run your own business, it’s almost a guarantee that at some stage you’ll have to pay some sort of tax. With numerous and seemingly complicated tax laws in the United Kingdom currently, it can be hard to know precisely which ones are for you or your company, and what tax forms you would actually have to complete for the HMRC. Here are the five small business taxes that you need to be on top of:
Income Tax
This tax is paid in respect of the profit of your company. If you have no other income such as a wage from a job, and what your company makes, then you’ll begin to pay income tax on the profit of your business once it goes beyond the personal allowance, of £11,850 if you’re below 75. If your corporation is a limited company, you may well pay income tax on any salaries or dividends that you take from the firm. Whether and how much you pay income tax depends on how much you make. Income tax comes in on your income if it’s over £11,850, you’re below 75, and you don’t have any other revenue. If your circumstances are different – say you have a new job and work for your own business – then you may start paying income tax on your salary earlier. If you pay income tax on your wages, it will be deducted by your employer, in this case, your own business, from your compensation under the Pay As You Earn scheme. PAYE is not a tax per se; it is a tool used by HMRC to obtain income tax.
National Insurance
Although not explicitly a tax, national insurance (NI) is money that is paid to the government, so it is often alluded to as a tax in all but name! Sole traders pay two types of NI. If you’re an entrepreneur, you’ll pay a weekly NI rate known as Class 2 NI, unless the profits from your company are below the Small Profits Level, which is £6,205. Level 2 NI amounts to £2.95 a week. If the income from your company is within the Small Profits Threshold, you can still voluntarily pay Class 2 NI to cover your State Pension rights and other benefits. You will also pay Class 4 NI once the income to your company reaches £8,424. Class 4 NI is calculated as a percentage of the revenue for your company. If your firm is a limited company and the corporation is paying you a weekly amount of £162.01 or more, it will have to subtract the NI of the Class 1 employee from your wages and pay it to HMRC. The business will also have to pay HMRC’s NI for Category 1 employer unless that’s protected by the work allowance.
Corporation Tax
Limited companies pay income tax on the profits they make. There is no personal allowance equivalent for limited companies, so as long as a company continues to make any income (unless it has made losses previously), it will begin paying corporation tax. Corporation tax is 19% for all companies and is due nine months and one day after the end of the company’s fiscal year. So, for example, a corporation with a year-end of March 31st will have to pay its corporate tax by January 1st. Sole traders do not have to pay corporation tax.
VAT
No matter what type of business you have – sole trader, partner, LLP or limited company – if your business makes sales that attracts VAT of more than £85,000 a year, you’ll need to report your business for VAT. “VATable sales” refers to sales of goods or services which, if made by a VAT-registered business, would have had VAT paid on them. VAT could be 20% standard rate, reduced rate of 5% or even 0% Under some circumstances.
Business Rates
If your business operates from office or retail premises, then business rates may have to be paid. This is like council tax but for business property. Many properties, such as farm buildings, are entirely excluded from business rates, and others may be entitled to compensation in business rates. If you’re running your business from home, you usually don’t have to pay all business rates and council tax. The exceptions are: hiring workers who also come and work at home; selling goods or services from home to visiting clients; if you have adapted your home to work there (such as transforming your workshop or shed to a dog grooming parlour); and if your property is part company and part domestic arrangement (such as running a pub and living above it.)
If you have any questions as to what taxes your company may be subject to, and when you may have to pay them, please contact your accountant or HMRC for assistance.