Whether you’ve dreamed of starting your own business for years or it has been a more recent and spontaneous decision, you will need to become well-versed in all things tax.
Tax compliance and planning is a vital part of running a business and it can often make or break the success of your enterprise if you fail to keep updated on any changes or new taxes that you should or shouldn’t be reporting and paying.
Below are the five types of tax that we think you and other small businesses should be most aware of:
Income tax will be charged when your salary is over £12,570 and if you are under 75 and do not have another source of income.
If you are a sole trader, partnership or any other form of an unincorporated business, you will start paying this on the profits of your business as soon as it goes over the personal allowance.
Be aware, that from April 2024 if you have a business and/or property income in excess of £10,000 you will have to report and record your tax information digitally each quarter under the new Making Tax Digital for Income Tax Self Assessment rules.
If you are a director of an incorporated business, such as a limited company, you will also be required to pay income tax on your salary, but could also be required to pay additional tax on dividends taken from the profits of your company.
If your business has a turnover of £85,000 or more per annum, you will need to register for VAT.
This is especially important if you are taking over a business for somebody else as the sales they already accumulated will count towards this yearly threshold and need to be considered.
If your turnover is below £85,000 you can voluntarily register for VAT should you choose to. This may allow you to reclaim some of the VAT costs you incur.
VAT is already subject to the Making Tax Digital rules, so you need to be aware of your responsibilities in this area.
If your business is a limited company, then Corporation Tax will be paid on any profits you earn. You must report these profits via a Corporation Tax return each year.
If your business occurs any losses or benefits from certain tax reliefs these may be offset against your profits to reduce the amount of tax that is paid.
Corporation Tax is set to increase from 19 per cent to 25 per cent from next April for all businesses earning more than £50,000. Those earning between £50,000 and £250,000 will benefit from marginal relief, which will help to reduce the effective rate of tax that they pay.
Unincorporated busineses, such as sole traders and partnerships, do not pay this type of tax.
This might seem like a mistake as National Insurance (NI) is not technically classed as a tax. However, in all ways other than its name, it serves as a payment to the Government that you will probably recognise from seeing it on every payslip since you began working.
When it comes to how NI will affect your business, it will depend on how much your business is making.
As a sole trader, you will pay a flat rate called Class 2 NI. But if your profits are under the Small Profits Threshold of £6,725 as of the 22/23 tax year, you do not have to pay but can choose to as it will protect your benefits including being entitled to State Pension.
Most businesses have an office or premises used and this results in paying business rates. Again, this isn’t really taxation as such, but it is seen by many as an other form of tax.
If your business is run from your home, you will not have to pay business rates as you will pay council tax already. Business rates are similar to council tax but apply to business properties.
There are some exceptions to paying business rates such as adapting your home to work there like converting a garage. If you run a café and live above it, you will be exempt from business rates.
It is really important that business owners accurately report their tax information and make the necessary tax payments on time to avoid being penalised.
For more information on the taxes you need to pay as a business owner, contact us today.