If you start your own business, you will be required to pay taxes to the UK government. It is vital that you educate yourself on your tax obligations, so you can plan your business’ finances effectively. Online portal Small Business recently featured an article on this subject. Turner Little selects the key points from this article to ask: which taxes could affect small business owners?
Income tax
If you are a sole trader, you will have to pay income tax on your firm’s profits. If you are under 75, you will have to start paying income tax when your profits have surpassed your personal allowance (currently £11,000), assuming this is your sole source of income. You may also have to pay income tax as the director of a limited company, if you take a salary or any dividends from the firm.
If you are a company director, your income tax obligations depend on how much money you draw from the firm. If you pay yourself a salary, you will start paying income tax if this wage is higher than your personal allowance. Your employer i.e. the business, will subtract income tax from your wages via the PAYE system, which HM Revenue and Customs (HMRC) uses to collect income tax revenue.
Corporation tax
If you run a limited company, your business will be required to pay corporation tax on all of its profits. Unless you have registered losses, you will begin paying corporation tax when you turn a profit, at a rate of 20%. The tax is payable nine months and one day at the end of your firm’s previous accounting year. For instance, you would have to pay your enterprise’s corporation tax bill by 1st January 2017 if your accounting period ended on the 31st March 2016.
Value Added Tax
Whatever type of business you run, you may have to pay Value Added Tax (VAT). There are certain products and services which are applicable to VAT. If sales of these products and services eclipse a certain threshold (currently £83,000) your company will need to register for VAT. There are various rates for VAT and these depend on specific products and services. The standard rate is 20% but VAT may be charged at a reduced rate of 5% or even at a rate of 0% on some products and services.
National Insurance
Whether you are a sole trader or the director of a limited company, you will have to pay National Insurance (NI) to HMRC. There are two types of NI for sole traders. Unless your firm’s profits are under the Small Profits Threshold (currently £5,965), you will pay the flat weekly Class 2 NI rate of £2.80 per week. You may wish to voluntarily pay Class 2 NI to the government even if your profits fall under the threshold, to safeguard your entitlement to benefits such as the State Pension.
As a sole trader, you will have to start paying Class 4 NI, which is based on a percentage of your profits, if said profits eclipse £8,060. If you run a limited company and your firm is paying you a wage of at least £8,060, it will have to deduct and pay Class 1 employees NI from your salary to HMRC. Unless it is covered by the employment allowance, your firm will have to pay Class 1 employer’s NI to HMRC.
Business rates
You may have to pay business rates to HMRC if your firm operates from an office or retail premises. However some premises e.g. farm buildings, are exempt from business rates. You will not usually have to pay business rates for a home-based business. You will have to pay business rates, however, if you have adapted your home for business purposes e.g. you have converted your garage or if your home is part domestic/part business e.g. you live above your own pub. You will also have to pay business rates if you sell goods and services from your home or your employees work at the property.
Establish your business
There are some taxes that you will be required to pay as a small business owner, but others depend on which type of firm you choose to establish. When deciding which type of firm you wish to set-up, research any applicable taxes so you can ensure you start the kind of enterprise which is right for your circumstances. If you choose to launch a limited company, as company formation agents Turner Little can provide you with the assistance needed to get your venture off the ground.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
