Tax & admin · 9 April 2021

The 5 main taxes your small business needs to know about

The 5 main taxes your small business needs to know about

Owning a small business comes with a lot of new challenges and responsibilities. One of the first things that most entrepreneurs will need to consider is their finances – including taxes.

All working individuals have to pay tax once they are earning a certain amount, and this is no different for businesses. But as a business, there are more taxes that you may have to pay than you were aware of.

Exactly how much you pay, the type of tax you are liable for, and your method of payment will all depend on the business structure you have set up. Sole traders, limited companies, and partnerships all have different taxation, so it is important to bear this all in mind when setting up your business or when it comes to paying your taxes.

Although many people are intimidated by taxes, there is no reason to worry if you have done your research beforehand. This guide gives you an idea of what the five main small business taxes are.

What taxes must a small business pay?

Tax obligations differ depending on your business structure.

Sole traders will start paying tax over a certain threshold and are obliged to pay income tax and national insurance.

In a partnership, all partners are obliged to pay income tax on their share of business profits as well as pay national insurance. If they reach the threshold, they will also need to register for VAT.

Limited companies work slightly differently – they are obliged to submit accounts and a company tax return as well as register for VAT once they reach the threshold. Limited companies also have to pay corporation tax. The rest of the taxation responsibility falls to the director who is required to pay income tax and national insurance through PAYE if they receive a salary from the company.

If your business is running out of a commercial property, you will also need to pay business rates. These are similar to council taxes, but only apply to non-domestic property.

What are the 5 major taxes?

When it comes to small businesses, the five major taxes are:

–          Income Tax

–          National Insurance

–          Corporation Tax

–          Value Added Tax (VAT)

–          Business Rates

Other taxes may be applicable depending on the type of business you run and which markets your business operates in.

Income Tax

Income tax is charged to individuals rather than businesses. Sole traders and partners will need to pay income tax through HMRC when they submit their tax returns. However, if you are receiving money through your company as you would in a limited company, then your income tax is taken from your salary package through the company’s PAYE scheme.

How much income tax you pay depends on how much profit your business has made in the tax year. Income tax is broken into tax bands or brackets with a basic rate of 20% going up to an additional rate of 45% for higher earners.

Not all incomes are taxable and there is a “trading allowance” of £1,000. The trading allowance is the first £1,000 of self-employed income and it is tax free. Gov.uk’s Income Tax Page also offers advice on other tax allowances and reliefs.

Generally, you will need to pay income tax on:

–          Employment earnings

–          Self-employed profits from goods and services

–          Some state benefits

–          Most pensions

–          Incomes from trusts

–          Some interest incomes

–          Some rental incomes

–          Job benefits

–          Capital gains

–          Dividends

If your income tax is not automatically paid through a PAYE scheme, you will need to fill out a self assessment tax return form for HMRC on an annual basis.

National Insurance

National Insurance is paid by all individuals either through tax returns or through company contributions. Although it is not technically tax, it is money that you are obliged to pay to the government, so it is often categorised as a tax payment.

Paying into National Insurance is what allows you to claim for government benefits including:

–          State pension

–          Maternity Allowance

–          Bereavement Benefits

–          Incapacity Benefits

Small businesses are protected from national insurance payments if they make less than the Small Profits Threshold, which is £6,205. Once you reach the threshold you will need to make Class 2 NI Contributions of £3.00 per week, paid annually. You can also choose to make these contributions if your earnings are below the threshold so that you still qualify for NI benefits.

NI Payments also go up if you earn over a certain amount and contributions are set at a percentage of your profits.

NI payments work similarly to income tax in that you will only pay them as an individual and not as a business. If you receive a salary from your business then contributions will be taken through your payment package.

Corporation Tax

All limited companies are obliged to pay corporation tax. Sole traders and partnerships are exempt from this tax.

Unlike other taxes, there is no threshold, so you will need to start paying corporation tax as soon as your company starts to make a profit. Main rate corporation tax is currently set at 17% and is payable annually.

Value Added Tax (VAT)

Regardless of the type of business you own, if you make over £85,000 a year on VATable sales then you will need to register for VAT. VATable items are any items that would normally have VAT charged if they were sold by VAT registered companies.

VAT rates have been fixed for a long time now, so this tax is easy to calculate. Currently, VAT is set at 20% standard rate, 5% reduced rate, and 0% on some exempt items.

VAT is paid quarterly rather than annually and needs to be paid to HMRC within 37 days of the end of the quarter.

Business Rates

Although some small businesses operate out of homes, most need an established workplace with offices, shopfronts, or specialised facilities. These properties require business rate payments. You will also need to pay business rates if you have converted a domestic property or part of it specifically for non-domestic use.

Your property will need to be zoned correctly and you will receive a bill from the local council to complete your payment annually.

 

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