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Starting a business requires a lot of passion, planning and making key financial decisions. It is certainly not just all fun and games, it also includes completing a series of legal activities, one of them being, paying your taxes.
In the initial stages you might be solely focused on getting profits but keeping up with things like tax legislation should also be a priority as failing to do so can land you in a mountain of unwanted penalties and fines from HMRC.
There are substantial penalties for businesses that pay their taxes too late and it is always a brilliant idea to understand your business tax obligations.
Now, you might have questions around which taxes you should pay, when your business should start paying tax and how much is it going to be?
The kind of business structure you choose will have an impact on how much tax you will pay.
Let’s first start with the different kinds of taxes and structures you should familiarize yourself with.
Sole Traders
Should you choose to trade as a sole trader, your tax-free personal allowance is £12,500 (For tax year 2020/2021). If you are earning less than that, you will not need to pay any income tax.
For sole traders, income tax will be paid based on the profit made from the business which is included on your self-assessment tax return.
If your business earns between £12,501-50,000, you’ll pay a basic 20% income tax rate. If your earnings fall between £50,001 and £150,000, you’ll pay 40%. And a 45% rate applies to businesses with a taxable income of £150,000 plus.
Sole traders do not need to pay corporation tax, but limited companies do. If your sole-trader business reach or is about to reach the VAT threshold of £85,000, you may also need to register for VAT.
Limited Companies
Should you trade as a limited company; you may have to pay corporation tax. Corporation tax is the tax on the profits made by your business over the financial year. It must be paid nine months and one day after your business’s accounting period ends but it needs to be filed within 12 months.
As you can see, the filing deadline is longer than the payment deadline. To avoid penalties and fines it is advisable to file and pay your Corporation tax return within the 9 months after your business’s accounting period ends. If for example, this date is March 31, it means you will need to pay corporation tax on January 1.
Currently, the corporation tax rate is set at 19% (2020/2021).
If your company tax return is late HMRC will issue a penalty. It starts off with £100 at 1 day late, another £300 after 3 months of no filing and at 6 months late, HMRC will write telling you how much Corporation Tax they think you must pay. This is called a ‘tax determination’ and you cannot appeal against it. They also add a 10% penalty of the unpaid tax. At 12 months late you will receive a further 10% penalty of any tax unpaid.
Limited companies are required to:
· send Companies House an annual tax return
· compile statutory accounts
· send a company tax return to HMRC
· If earnings exceed £85,000 you may also need to register for VAT.
· In addition, a director of a limited company may also be required to submit a self-assessment tax return and pay tax/National Insurance through PAYE if they receive a salary and/or dividends from the business
You must still submit a corporation tax return (CT600) if your company make a loss or have no Corporation Tax to pay.
There are also other types of ‘taxes’ that might apply to you, including National Insurance and VAT.
National Insurance
While not strictly a tax, National Insurance (NI) is money that’s paid to the government, it’s often referred to as a tax.
Sole traders pay two kinds of NI, a weekly rate of NI called Class 2 National Insurance (unless your business’s profits are under the Small Profits Threshold which is £6,475) and Class 4 National Insurance.
Class 2 NI is £3.05 per week. If you do not pay your weekly rate this will automatically get added on to your tax liabilities when your self-assessment has been filed. If your business’s profits are under the Small Profits Threshold, you can still pay Class 2 National Insurance voluntarily, to protect your entitlement to State Pension and other benefits. You will also pay Class 4 National Insurance if your business’s profits are between £9,500 and £50,000 (at 9%) and at 2% on any further profits over £50,000, (2020/2021 rates).
If your business is a limited company, and the company is paying you, then it will have to deduct Class 1 employee’s National Insurance from your wages and pay that over to HMRC. National Insurance for employees from April 2020 was set at 12% for pay between £9,500 to £50,000 and 2% for any pay over £50,000.
The company will also have to pay Class 1 employer’s National Insurance to HMRC which is paid at 13.8% for earnings above the secondary threshold which is £8,784. Some companies may be eligible for employers allowance up to £4,000.
VAT
No matter what kind of business structure your company is set up as (sole trader, partnership, LLP or limited company). If your business makes VAT-able sales of more than £85,000 in any 12-month rolling period, or you know that it will, you will have to register your business for VAT. You can also apply to register your business voluntarily. The VAT taxable turnover is the total of everything sold that is not VAT exempt. You can only charge VAT if your business is registered for VAT.
You must register for VAT if:
· You expect or realise that your VAT taxable turnover is going to be more than £85,000 in the next 30-day period, you must then register by the end of that 30-day period
· Your business had a VAT taxable turnover of more than £85,000 over the last 12 months.
· You might also need to register in some other cases depending on the kinds of goods or services you sell and where you sell them
· Some business activities are exempt from VAT, or partly exempt. Businesses that sell only VAT-exempt goods cannot register for VAT. But if you start selling items that are not VAT exempt, you can register voluntarily. Exempt items and Zero-rated supplies are different. Zero rated goods or services are taxable for VAT but at 0%, Exempt items are not taxable, and you would simply not include exempt goods or services in your taxable turnover.
Supplies that qualifies for VAT and the VAT rate you would charge depends on the type of goods or services you provide. Goods exported or services provided outside the UK and the EU or sent to someone registered in an EU country needs to be treated in accordance with those specific rules. VAT rates and rules can be quite confusing and applying the wrong treatments could lead to charges and fines or even a HMRC VAT investigation.
The current VAT rates are:
· Standard rate at 20%
· Reduced rate at 5 %
· Zero rate at 0 % (for some exceptional goods)
If you are in any doubt about what taxes your business might be subject to and when you might have to pay them, we are more than willing to ASSIST 😊
Assist provides high-quality accounting and support services to businesses across a range of sectors and sizes. Assist opened its doors in early 2019, with only a team of two. We pride ourselves as being one of the most highly rated, forward thinking accountants in Oxfordshire. Based in the market town of Wantage, we are a small friendly team with comprehensive experience in accounting and business services.