When starting a new business you may feel overwhelmed by the amount of different taxes that you need to be aware of, report on and pay.
Table Of Contents
The following is a brief introduction to the various types of small business tax that you will encounter and need to have a working knowledge of.
VAT – Value Added Tax
For most businesses it is compulsory to register for VAT if the turnover of the business is more than the VAT threshold (currently £77,000). However, there are some exemptions to this, for example health providers, insurance providers, rental of domestic property. We recommend that you check with HMRC or your accountant to check the specific HMRC VAT guidance for your sector.
Businesses can voluntarily register for VAT if they are under the threshold, as there may be some advantages to doing so in specific circumstances. For example; when a business starts up it may have a large amount of purchases which incur VAT, by registering for VAT the business can reclaim the VAT on the purchases.
PAYE & NI – Pay As You Earn & National Insurance
If you employ staff you will need to run a PAYE (payroll) system. PAYE (income tax) is deducted as appropriate from the employee, as is employee NI and employer NI is charged to the employer. This is calculated monthly and should be paid across to HMRC by the 22nd of the following month, however, if the payroll is small may be paid quarterly.
If you have a lot of low paid or part time staff there may not be much PAYE and NI to pay, however, a nil return still needs to be filed. If there are statutory payments to be reclaimed example, SMP (statutory maternity pay), SSP (statutory sick pay) and/or SPP (statutory paternity pay), you may even be in a rebate position, and you can apply to HMRC for this to be paid to you.
If you are running a limited company you will need to be aware of corporation tax. The rate for small businesses is currently 20%. This tax is calculated upon the net profits of the business. We recommend that you use an accountant to prepare your corporation tax return and statutory accounts, as the rules are complex for calculation and regularly are amended.
Whether you are a company shareholder/director or a sole trader/partner you will probably need to file a personal tax return.
If you are a sole trader / partner you will need to pay class 4 NI (9%) on your profits and income tax, and also class 2 NI, although if your profits are small you may qualify for exemption. If you are a director/shareholder you will need to pay regular PAYE and NI on any salary received from the company, dividends are subject to income tax, however, under the higher rate tax threshold you may not have any personal income tax to pay. More details on extracting money from your business can been seen here: Extracting Money Tax Efficiently