Small businesses in the UK are subject to a number of taxes that depend on the structure, activities and performance of the business.
Make sure you take taxes into account since the beginning of your business and you know which contributions your business must calculate and pay to HMRC so you’re not caught out.
Here’s what you need to know.
Why should your business care about taxes?
The first reason, even if it’s too obvious, is that to foster economic growth and development, the government needs sustainable sources of funding. In other words, taxes are necessary for a prosperous society and failure to do so or not doing it properly can lead to penalties and fees.
However, not only to avoid fines, you should care about taxes to make sure you take advantage of them. For example, many jurisdictions offer generous tax reliefs for founders and early-stage investors or businesses that incur R&D costs in their development stage.
So it is well worth spending time finding out which reliefs are available in your jurisdiction and taking the necessary steps to meet the conditions.
Taxes small businesses should know
Corporation Tax is paid by limited companies only and is calculated as a percentage of a business’ profits – the money you make after deducting all allowances, tax relief and expenses such as salaries.
It’s payable nine months and one day after the company’s accounting year ends, and it is currently set at 19% although it will fall to 17% in 2020.
This tax is self-assessed so you need to calculate how much Corporation Tax your business owes and files the return with HMRC, along with payment for the tax it owes.
If your business is a limited company, you can pay income tax on any salary or dividends you take from the company. Whether you pay income tax, and how much you pay, depends on how much you take out.
If you’re paying income tax on your salary, your employer, in this case your own company, will deduct it from your salary under the PAYE (Pay As You Earn) scheme.
Sole trader tax is paid on your business’s profit. If your sole trader business’s annual net profit combined with any other taxable income you receive falls in a range between £12,501-£50,000, you’ll pay the basic income tax rate of 20% and a higher rate of 40% above £50,001.
If your business employs staff then you must pay National Insurance contributions.
Your limited company must pay employer’s NICs at 13.8% on employees with wages more than £166 per week.
Sole traders also must pay National Insurance contributions (NICs). If you make more than £6,365 a year, you must pay flat-rate Class 2 NICs (£3 per week in 2019/20) at the same time as your income tax.
Value Added Tax (VAT)
If your small business sells products and services, then it may need to start charging Value Added Tax.
In general, VAT is set at 20% of the price a customer buys the product or service. You can register your business for VAT at any time, but legally you must register your business for VAT when your turnover exceeds £85,000.
VAT is charged to customers as a separate amount on an invoice and is then paid to HMRC on a quarterly basis. Once registered for VAT, you can claim back any VAT the business pays on products on services.
Business rates are usually applied if you operate your business from dedicated premises, such as a shop or office.
Business rates operate like Council Tax, and different businesses may have to pay different rates – there are also lots of business tax relief schemes and grants available.
If you run your business from home and don’t have visiting customers, or have not converted part of your home for the dedicated business activity, then you should not generally have to pay business rates.
We hope this helps! However, we recommend you to seek expert advice to make sure you’re recording your taxes properly and avoid later surprises.
Book a call with our legal team and we’ll guide you through every stage of your legal needs.