It’s never been easier to start up your own business. As soon as you register with HMRC (and Companies House if you are starting a Limited Company), you are on your way. But there are many things to learn on the way.
Including tax. As an employee, it’s something that’s automatically dealt with before you received your salary each month. As a business owner, it’s not that simple.
But, that doesn’t mean that it needs to be complicated either.
Here’s a simple guide to the different type of taxes that you will come across and possibly have to pay as a small business owner.
This is calculated differently dependent on whether you are a sole trader, or a limited company.
As a sole trader, you need to pay tax once your business makes a profit over a certain amount. This changes every year, for the 2016/17 tax year, this is £11,000.
As a limited company, you’ll probably take a salary or dividends from the business, and you may well need to pay income tax on this. In this instance, this would be the same as if you had a job, but you would own the company as well as being an employee! Again, this kicks in when you earn over £11,000.
This is of course, assuming you don’t have any other income to take into account, such as from a job, or income from renting a property for example.
This tax will only apply to you if you have a limited company. As a limited company, you need to pay tax on your profits. Corporation tax is currently 20%, and it is payable exactly nine months and one day after your accounting year end. However, you are also able to offset any losses against any profit you have made from the same trade, so it may be that as a start-up limited company, you do not need to pay this for the first couple of years or so if you have made a large loss at the onset.
If your business has an income of over £82,000 on which you should be paying VAT, then you need to register your business for VAT.
The sales you make may be charged at different rates of VAT, but regardless of what they are, you will need to ensure your business is registered for it. This means that any invoices you issue or prices you charge must include VAT.
If you run your business from premises such as a shop or retail space, then you will need to pay business rates. Think of it as council tax for businesses (which is why it’s in this blog!)
There will be certain types of buildings that are exempt from these rates, so it’s wise to seek advice.
For example, if you work from home, you won’t usually have to pay business rates as you are already paying council tax, but if you conduct any business meetings there, or other employees come and use your home as an office, then you may well be liable to pay rates. Again, it’s worth seeking professional advice.
‘Sort of tax’ National Insurance
I’ve included this in this blog, as National Insurance is almost a tax, as it’s an amount of money that is paid to the Government.
It was originally to go towards certain types of state benefits, such as illness and unemployment, but also at a later date, pensions and the NHS.
If you are self-employed, there are two types of National Insurance you have to pay. The first is called Class 2, which costs £2.80 each week, but you only need to pay this if your business is making a profit over a certain threshold (currently £5,965). If you make less than this, you can still pay these contributions voluntarily, so that you will be entitled to the state pension or other benefits if you need them.
You will also need to pay Class 4 contributions again if your profits are above the threshold (currently £8,060), and this will be a percentage of your profits, calculated at different thresholds.
It is worth noting that Class 2 NI is being abolished as of April 2018 and Class 4 is being reformed.
So as you can see, there are some taxes that you need to get your head around, so you are aware of what taxes you may need to pay. If you are unsure, then it’s wise to seek professional advice, as the last thing you want is HMRC knocking on your door!