What is the definition of a small business in the UK?According to Companies House, a small business in the UK can be defined as a business that has under 50 employees and turns over less than £6.5million. Keeping this definition in mind, it is safe to say that the definition of a small business could apply to a wide range of different businesses, including hair salons, coffee shops, small car dealerships, retail stores etc. But no matter the type of small business, you’ll still be liable to pay some sort of tax, no matter how much you’re earning.
What do small businesses need to do before they start paying tax?The first thing you’ll need to do is register your business with the HMRC so that they are aware of your business. If you register as a limited company, you’ll also need to register with Companies House. The process for both is fairly easy, self-explanatory and can be done online in a matter of hours. Once you have done that, you will need to keep detailed and updated records of all of your business income and expenditure, so when it comes time to file your tax returns, you have everything in order. If you are a business that is employing people, you will need to register as an employer with the HMRC and sign up for a PAYE scheme that will assist you in paying tax on all of your employees’ salaries each month. The next step is to clue yourself up on everything you need to know about taxes as a small business owner.
Corporation taxCorporation tax is one of the most important taxes that you’ll need to handle if you have registered as a limited company (sole traders do not need to pay corporation tax). Corporation tax is the tax that you’ll be required to pay on your business’s profits over the financial year. It needs to be paid by nine months and one day after your business’s accounting year, and this day usually falls on 1 January. While there are different tax brackets and thresholds involved, corporation tax is usually 19% of your business’s profits.
Income taxIncome tax is the tax that you pay on your personal income. This income could come in the form of a salary that you take from your small business or through dividends. So, if a company director does not take a salary from their limited company, they will not need to pay income tax as income tax is only required on salaries and dividends. The current income tax brackets in the UK are as follows:
- £12, 501- £50, 000- 20%
- £50, 001- £150, 000- 40%
- Over £150, 000- 45%
National Insurance ContributionsYour national insurance contributions are very important as they allow you to build up a pension fund and pay for public amenities and services. The amount that you’ll pay in National Insurance Contributions will depend on how much you earn. If you are a limited company director, your National Insurance Contributions will be paid via your PAYE scheme. However, if you are a sole trader, you’ll calculate your National Insurance Contribution when you do your self-assessment. There are four different types of National Insurance Contributions, including:
- Class 1- Needs to be paid by employers and employees
- Class2 – A flat rate that needs to be paid by the self-employed
- Class 3- This is a voluntary contribution that is often paid by people who want to complete their National Insurance record so that they’ll be eligible for benefits
- Class 4- This needs to be paid on the profits made by the self-employed each year
VATMost people are familiar with the concept of VAT. Value Added Tax is added to the value of certain goods and services in the UK. Your company only needs to register for VAT if your turnover exceeds £85, 000 within a financial year. If your turnover is below this amount, you still have the option of registering for VAT if you so wish. However, this decision should not be taken lightly as you could end up paying a lot in tax, and you’ll need to push up the price of your products and services by a substantial amount. The only pros that are associated with registering for VAT when you don’t need to are that your company may appear more professional. It may open up trading opportunities with other VAT registered companies, and you will also be able to claim VAT on your tax return, which you would not be able to do if you were VAT registered. VAT needs to be paid quarterly and within 37 days at the end of each quarter.
Payroll taxNot all small businesses have employees, but most do. If you’re registered as an employer and have at least one employee, you’ll also need to handle your company’s payroll tax. This tax is paid monthly to the HMRC through the PAYE system and needs to be paid for all employees who earn more than £120 per week. The amounts paid will depend on your employee’s wages and salaries. If the amount you pay is usually less than £1500, you can request to pay this tax quarterly instead of monthly. You’ll also need to handle paying all of your employee’s National Insurance Contributions, which can also be done through your PAYE scheme. If you are dealing with paying employees and the PAYE system, it is highly recommended that you invest in relevant PAYE software, as it will make your job so much easier. PAYE can get quite confusing, especially when you start gaining more than just a couple of employees.
Taxes for sole tradersSole traders have a tax-free personal allowance of up to £12, 500. Once your personal allowance starts exceeding this amount, you’ll need to start paying income tax. The income tax brackets are as follows:
- £12, 501-£50, 000 – 20%
- £50, 001-£150, 000 – 40%
- Over £150, 000 – 45%
Taxes for limited companiesIf you’re a director of a limited company, you’ll be responsible for sending Companies House and the HMRC a tax return at the end of every financial year. Company directors also need to complete and submit self-assessments and pay tax on their earnings. When it comes to National Insurance Contributions, company directors will need to pay NIC on their salary. If you have employees, you’ll also be responsible for paying NIC on their salaries. This will be done through PAYE, as will your self-assessment. If your company’s earnings are exceeding £85, 000 in a 12 month period, you’ll also be required to register for VAT and pay VAT.
Taxes for partnershipsPartnerships have very similar tax obligations to limited companies. Each partner will be responsible for paying income tax on their share of business profits. Each partner will also need to complete their own self-assessment and pay NIC on their salary if they take one. A partnership self-assessment tax return will also need to be sent on an annual basis. Like sole traders and limited companies, partnerships need to register for VAT if their turnover exceeds £85, 000 within a consecutive 12-month cycle.
Some important tax-related deadlinesGet your calendars out and mark these deadlines so that you don’t forget them!
- 31 January – The last day for self-assessment tax returns to be submitted in the UK
- 5 April – End of the financial year in the UK/ deadline for claiming a PAYE tax refund
- 6 April – Start of the new tax year in the UK/ last day for claiming a tax return in the UK
- 31 May – Send P60 documents to employees if you have any
- 31 July – The last day for second payment on tax accounts
- 5 October – Deadline to register your business with the HMRC
- 31 October – The last day for the paper version of the 12-month self-assessment
- 31 December – Deadline for online submission of tax returns through self-assessment
Additional tax tips for small businessesNow that you know what taxes you’ll need to pay as a small business, here are a few more additional tips to help you with your tax obligations!
- Meet deadlines – Make sure you are 100% sure of all deadlines and that you meet them on time to avoid heavy, unnecessary penalties. Deadlines can be found on the HMRC and Companies House websites.
- Keep accurate records – As a small business owner, you may fall behind in keeping detailed records, but it is absolutely vital that all of your records are up to date and each expense and income is recorded. If not, you could find that your books don’t balance, and you could be in for more penalties.
- Ensure that you claim for allowances – when submitting your tax returns, ensure that you claim for any allowances that are applicable to you.
- Keep your tax safe – ensure that you don’t spend any of the money that needs to go towards tax. If you aren’t able to pay your tax, you could experience some severe issues.
- Invest in accounting software – make use of the technology that we have available to us in this modern-day and age by investing in accounting and PAYE software that will help make your tax processes all the easier.
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