Tax
Who is this for?
This is for you if you have just started, or you are planning to start your own business and you want to get a high-level understanding of the main taxes involved. For a more detailed understanding, speak to your accountant, a tax professional or check out the HMRC webpages.
Note: The information contained herein is for guidance only and may change over time. You should always seek professional advice and support to ensure that it is most appropriate to you and your own individual circumstances.
Tax issues are particularly important, and you should always engage an accountant to advise on your own specific circumstances.
Income tax
If you have been in work as a salaried employee, you will be familiar with the income tax that is deducted from your wages or salary on a weekly or monthly basis.
Sole Trader
Income tax is also the tax that you will pay as a sole trader or self-employed business owner based on your taxable profits. It is calculated at the same rate as if you were in employment and you will be entitled to the same tax allowances as a salaried employee.
How it is paid is different. After you register as self-employed with HMRC, you will be required to complete an annual self-assessment tax return. This is completed online by 31 January in the year following the tax year. So for the tax year ended 5 April 2022, your tax return will be required by 31 January 2023. Late filing attracts an automatic penalty (currently £100).
Payment is also due by 31 January each year, with often an advance payment due for the following tax year, with 50% payable at the end of January and 50% by 31 July.
Partnership
Partnerships are not taxed as a separate entity but each individual partner is taxed on his/her share of the profits. A partnership tax return is required annually along with a self-assessment tax return for each individual partner.
Drawings
Withdrawing money from a sole trader business or partnership is usually by way of drawings and this is achieved by transferring the money to the owner’s personal account. So normally no need to set up a payroll system for the owner of the business or partnership. The owner or partner is taxed on the profit, not the drawings.
Making Tax Digital (MTD)
HMRC is expanding the Making Tax Digital Scheme (MTD - currently for VAT registered businesses) to self-employed and partnership businesses from 6 April 2024. For more details click here.
Corporation Tax
Corporation Tax is the tax that corporations, or limited companies pay. You must register your company for corporation tax and it is levied at a different rate to income tax and the returns timetable is different. Corporation Tax returns require to be submitted within 12 months of the financial year end, with any tax payable within 9 months and one day of the financial year end.
In a limited company the owners receive their share of the profits by way of either salary (if they are also a director or employee or by a dividend, usually declared annually.
The salary is subject to withholding tax based on PAYE and the dividend is subject to a dividend tax rate and both are recorded in the self-assessment tax returns of the directors, which also have to be completed annually by 31 January.
You can read more here.
VAT
You must register for VAT if your VAT taxable turnover goes over £85,000 (the current ‘threshold’), or you know that it will. Your VAT taxable turnover is the total of everything sold that is not VAT exempt.
You can also register voluntarily.
VAT is currently already subject to Making Tax Digital rules and there are very specific rules for VAT that can be checked out here.
Pay as you Earn (PAYE)
As an employer you must register with HMRC for payroll purposes.
This tax is deducted from employee (and director) salaries each month and paid over to HMRC when it is due. Every time a payroll is run, you must submit a Real Time Information (RTI) report, and this can be done digitally using a payroll software programme either part of a cloud-based bookkeeping system or a separate standalone system.
Many businesses outsource their payroll to their accountants or other payroll specialist providers.
National Insurance
Don’t forget National Insurance requirements, which are another form of “tax” collected that has to be paid to the government.
There are various rules, thresholds and deadlines that need to be adhered to and these can be checked out here.
Tips for managing your business taxes
As a business owner taxes are collected differently to those of employees whose taxes are deducted by their employers and sent to HMRC on their behalf under the PAYE scheme.
There is more onus on the business owner to set aside the taxes required and pay them over on their due dates
Useful Sources