Nothing is certain except death and taxes! Apparently there is debate about who said this first, but experts say it’s from the 18th century!
For small business owners today, there are many complicated tax rules that it can be tricky knowing which ones apply to you.
We have looked at becoming more tax-efficient if you are a freelancer or contractor in the past. But what kind of taxes should you be aware of?
If you are a sole trader, you pay income tax on the profit your business makes. As long as you don’t have other income, such as a salary from a job, then you will pay income tax on your business’s profit once it exceeds the personal allowance. At the moment, that is £12,500!
You may pay income tax on your salary or dividends if your business is a limited company. Whether you pay it and how much depends on what you take out.
If your salary is more than £75,000 and you’re under 75 with no other income, you will pay income tax. You may pay income tax on your salary sooner if you have different circumstances, such as having another job as well as working for your company.
Your employer (ie your company if you own a limited company) will deduct your income tax from your salary under PAYE. Find out more about PAYE and what it means here.
Although not a tax, National Insurance (NI) is one in all but its name. Sole traders often pay two types of NI: Class 2 and Class 4. In each case, you pay your NI annually through self-assessment.
Class 2 NI is a flat weekly rate of £3 that is paid if your business’s profits exceed £6,205 per year. If it falls under this (which is known as the Small Profits Threshold) you can pay Class 2 NI voluntarily to protect your state pension and other benefits.
Class 4 NI is also paid by those whose business records profits between £8,632 and £50,000, which is 9% of profits. You pay an extra 2% on any profits that exceed £50,000.
For those taking a salary from their limited business, then Class 1 employee’s NI is deducted from your wages which is paid to HMRC. This is currently set at 12% for salaries between £8,632 and £50,000 and an extra 2% for wages over £50,000. The company also pays Class 1 employer’s NI to HMRC.
As soon as a limited company makes profits it starts paying corporation tax. The company pays tax once it makes a profit.
The main rate of Corporation Tax is currently 19% for all companies. It is payable 9 months and 1 day after the firm’s accounting year-end. So, if a company’s accounting year ends on 31st August it will have to pay its corporation tax by 1st June the following year.
Only companies pay Corporation Tax, it is not a paid by sole traders.
All businesses – such as sole traders, partnerships, LLPs and limited companies – will need to register for VAT if they make VATable sales of more than £85,000 a year.
VATable sales mean selling your goods or services that would have had VAT charged on them were they registered for VAT. The current standard rate of
VAT is 20%, the reduced rate is 5% and for some exceptional goods, there is a 0% rate.
Finally, you may have to pay business rates if you have business property.
At the moment, if your premises has a rateable value of less than £12,001 you qualify for small business rate relief. This means you effectively pay no business rates. There is also some relief for properties with a rateable value of less than £15,000.
If you run your business for home, you don’t normally pay business rates in addition to council tax. But there are exceptions, which are:
- Staff employed and work at your home
- You sell goods or services from your home to visiting customers
- You have adapted your home to work there (such as converting your garage)
- Your home is part business and part domestic, such as a pub.
If you are unsure about any element of the taxes you pay, contact us today for a no-obligation meeting. We are accountants based in Newcastle but deal with businesses across the North East and the UK.