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[28.05.2019]

Start up series: What taxes do small businesses pay?

Welcome to the sixth blog in our series on start up businesses. To read earlier blogs in the series click here.

If you have always been an employee of a company before starting your own business then it is likely that the only tax and National Insurance you would have had to pay would have been handled through your employer’s payroll scheme without much involvement from yourself. It can therefore, understandably, be a little daunting moving into the world of self-employment and having to deal with your taxation obligations yourself. When it comes to dealing with tax affairs getting a good accountant on board in the early days can really help. Your accountant can guide you through the process and ensure you are using your tax allowances effectively and claiming any reliefs available to you.

In this blog we would like to give an overview of some of the taxes you may be subject to as a small business owner. For specific tax advice please contact us to arrange a meeting where we can learn more about your personal and business situation and objectives and advise on your affairs and the potential impact of taxation.

Sole Traders and Partners

Sole traders and partners in a partnership are required to pay Income Tax and National Insurance Contributions (NICs) which are calculated and filed via your annual Self Assessment tax return. This return details business sales revenue and outgoings after tax allowances and deductions are taken into account.

The standard personal tax allowance for 2019/20 is £12,500 and Income Tax is paid on earnings over this, subject to deductions and allowable expenses and reliefs. Income tax is charged at 20% for the basic rate (earnings between £12,501 and £50,000), at 40% for the higher rate (£50,001 to £150,000) and is 45% for the additional rate (over £150,000). Please note Income tax bands are different in Scotland.

National Insurance Contributions (NICs) are also paid by sole traders and partners.  For 2019/20 if a sole trader or partner earns more than £6,365 in the year Class 2 NICs must be paid at £3 per week. If your business has taxable profits of over £8,631 you will also have to pay Class 4 NICs which are charged at 9% on profits between £8,632-£50,000 and 2% thereafter.

Limited Companies

Corporation tax is due on business profits, minus any reliefs claimed, and is currently set at 19%, although this is due to drop to 17% from 1 April 2020.

A person (whether a shareholder or not) working in a limited company is an employee of that company, and not a sole trader. Therefore your Income tax and NICs will be paid through the company via the company PAYE (pay as you earn) scheme through payroll. The limited company will also be required to pay employer’s NICs at 13.8% for employees with wages over £166 per week.

As a shareholder in the company you can also pay yourself dividends, providing the cash is available. The first £2,000 of dividends is not taxed but you will pay tax on dividends over this. The amount of tax paid is determined by your Income tax band. The basic rate payable is 7.5%, the higher rate is 32.5% and the additional rate is 38.1%. Please contact your accountant to discuss the most efficient remuneration for you and your business to ensure you are using your tax allowances effectively.

Business Rates

Business rates are paid to the local council on commercial properties such as offices, shops, industrial units, warehouses etc.

If you are using part of your home for business, e.g. a spare room as an office, you won’t usually need to pay business rates. However if you make significant changes to your home for commercial reasons, sell products or services to visiting customers or have employees working from your home then business rates may apply. There may also be tax consequences when you sell your home if a business has operated from it.

You can estimate the business rates due on your commercial property by visiting the following page on the UK Government website: https://www.gov.uk/calculate-your-business-rates

VAT

You must register with HMRC for VAT when your gross VATable year-to-date turnover reaches £85,000 (2019/20). Upon registering you will be given a VAT registration certificate which shows your VAT number, effective date of registration, and the date when you need to submit your first VAT return and make your first VAT payment.

From the effective date of registration your business must charge the appropriate amount of VAT. In the majority of cases VAT is 20%, however some goods are subject to 5% VAT or are zero-rated or exempt.

Once VAT registered your business will be required to keep detailed records and workings to support the VAT returns you submit. From April 1 2019 VAT registered businesses are required to submit VAT returns digitally under the Making Tax Digital (MTD) regime. For more information on digital submissions and MTD click here.

Other Taxes

This is only a brief outline of some of the most common taxes that are likely to impact a new business. There are other forms of taxation that may affect a business or individual depending on individual circumstances.

The DNG Service

Here at DNG Dove Naish LLP we provide a comprehensive taxation and tax planning advice service. For more information on the taxation services we provide click here. Contact us today to discuss what we can do for you and your business.

This blog is part of our series of blogs on start up businesses. To read earlier blogs in the series click here. Next week will mark our final blog in the series and will summarise the start up series, while also giving some top tips to keep in mind when starting a new business.

Ian Lowry

 

 

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