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Tax guide for small businesses

This guide will look at all the different kind of taxes that, as a business owner, you need to be thinking about.

Which taxes is my business liable for?

All businesses in the UK pay a variety of taxes no matter what industry they are in. Here are the most common taxes you’re likely to encounter whilst running and managing a small business.

Income Tax: If you employ staff, this is important for you to know about, as this type of taxation will come from you and your team - based on what each of you earns. At the moment, no person in any company or organisation needs to pay any tax on the first £11,500 that they earn. The best way to understand this is the more you earn the more income tax you have to pay.

Band

Taxable income

Income tax rate

Personal Allowance

Up to £11,500

0%

Basic rate

£11,501 to £45,000

20%

Higher rate

£45,001 to £150,000

40%

Additional rate

over £150,000

45%

(Correct as of 1 June 2017)

National Insurance: If you are employing any staff, you’re liable to pay National Insurance. This is essentially a type of tax that goes towards state assistance. But more importantly it is something you need to be doing for yourself and for anyone who works for you.

It’s also important to note that there are National Insurance bands. These are the ones that you need to be aware of.

  • Class 1 - employees earning more than £157 a week - which the employer will deduct from the salary
  • Class 1A and 1B - These are paid by employers directly on employees expenses or benefits
  • Class 2 - For self employed and earning more than £6.025 a year
  • Class 3 - Voluntary contributions in your national insurance record. These can be made to fill or avoid gaps in your National insurance record. Class 4 - For self employed people earning over £8,164 a year

To summarise. Employees pay for Class 1 but the employer is responsible for having this deducted from their salary. Employers are responsible for paying for Class 1 A and Class B

Paying National Insurance as an employer is a relatively straight forward process. This can be done through PAYE. This is essentially a bill that goes towards HMRC that covers both income tax and National Insurance. PAYE is paid on the 22nd of the next tax month, if you pay it monthly. Or you can pay it quarterly if you wish - also on the 22nd of the end of that month.

There are various ways to pay PAYE: this can be done on the phone; through a bank transfer and as direct debit. For more information on the other ways to do this see here for more information.

VAT: This is a tax based on company earnings reflecting the success of a product or service. Let’s say your business is taking earnings of more than £81,000 in a 12 month period, then your business is doing well enough that it must pay VAT (Value added Tax).

Registering for VAT is a straightforward process that can be done online. Once registered, you then have to send over a VAT return every three months in order to fully comply. If you wish, you can choose to register for VAT, even if your business's turnover is less than this amount.

If your business is based outside the UK then there is no threshold for VAT. As soon as you start trading in the UK you will have to register.

There is a way to get VAT exemption for goods and services that you might be selling. Things such as charity fundraising, education and training are all exempt from VAT.

If your business sells solely goods and services which are exempt from VAT then your business itself will be totally exempt from VAT and cannot incur incur any VAT charges from any of your products.

VAT allows you to claim back certain things - if they are for your business. According to gov.uk if for instance “Half of your mobile calls are private. You can reclaim 50% of the VAT on the purchase price and the service plan.” Or “If your work from home and your office takes up 20% of the floor space in your house. You can reclaim 20% of the VAT on your utility bills.”

It’s important to note that anything you are using solely for private and personal use is not something that you can claim back. Other items you can’t claim anything on also include anything from outside the EU; statutory fees such as congestion charges or goods you sell as part of a hobby.

Corporation Tax: This relates to whether your business is registered as a limited company. You will be liable for taxation on any profits that your company makes in a 12 month period (which will be made clear in your annual accounts). The amount currently stands at 19 percent.

Corporation tax needs to be paid 9 months and 1 day after the end of your company's accounting period during the financial year. Unlike other taxes there is no final bill that is sent to you in terms of how much you pay.

But there are ways to prepare for payment

  • Register for corporation tax as soon as you start trading
  • Keep all of your accounting records up to date and prepare a company tax return - which will give you an idea of how much you are meant to pay.
  • Pay corporation tax - this can be done through HMRC electronically; through telephone banking or by debit card by the deadline. This cannot be done by post.
  • Then you file your company tax return afterwards.

If you are paying online or through your bank, you can pay your corporation tax with a 17 character Corporation tax payslip number for the accounting period. You will be able to find this on any payslip HMRC send you. Make sure that you do this on time otherwise HMRC could charge you interest.

It’s important to note if your company makes profits from the UK and overseas you will be taxed for both. But, if your company is based in another country, and does business in the UK, you will be taxed for money you make in the UK.

Tax on dividends: These are profits that are paid to shareholders on an annual basis by the company. Currently there is a tax free allowance (up to £5,000) this then increases as you will be able to see below.

Tax band

Tax rate on dividends over £5,000

Basic rate

7.5%

Higher rate

32.5%

Additional rate

38.1%

(Correct as of 1 June 2017)

What is taxable?

You might be reading this thinking ‘Wow, all these taxes. What do I get to keep?’. But not every penny that your business turns over is taxable. There are many deductions that can be made, and once these have been made the outstanding amount (your taxable profit) is the money that will be taxed.

There are deductions you can make from business expenses. This would include everything you need to run your company. So spending on goods, marketing costs, insurance and so much more.

If you are classified as self employed then the following costs can be claimed back as allowable expenses:

  • Office costs - such as phone bills and stationery.
  • Travel - fuel, parking or any other fares incurred such as train tickets.
  • Clothing - uniforms for example.
  • Staff expenses - for paying salaries to staff and subcontractors
  • Essential materials to sell - things you are buying to sell such as raw materials.
  • Financial costs - such as bank charges
  • Business premises - this could be general maintenance costs for things like heating, lighting or even business rates.
  • Marketing - general ad costs incurred to promote your business.
  • Home broadband - if you work from home and don’t have a separate broadband you can claim the full business use of this
  • Accountancy fees - hiring accountants and solicitors for your business.

However it is very important to note that this would not include any money taken from your business to pay for any private purchases. For example, if you are expensing business broadband you won’t be able to include a private line that you use for personal use. Entertaining clients for an expensive lunch might seem like a good way to get business but it does not fall into the category of allowable business expense for deduction. For more specifics on what HMRC requires see here for more information

You can also deduct capital allowances (the purchase of assets used by business, such as machines or computers), an annual investment allowance, and business losses.

Help and advice about your tax and finding a qualified accountant is available through several sources, including HMRC and the Consultative Committee of Accountancy Bodies.