Managing your money
Liberis’ Guide to Small Business Taxes - Part One: Understanding Your Taxes
Part One: Understanding Your Taxes
Part Two: Tax Tips
Marking the beginning of the new tax year, the 6th April 2017 brings about a number of government changes to UK tax laws. These may have an impact on the taxes you’re used to paying as a small business owner, so it’s important that you’re aware of the updates and how to keep on top of them all.
Obligation to paying these types of small business taxes are dependent on the registered nature of your business, and the profits you make. Stay in the know this tax year with Liberis’ Tax Guide for Small Businesses, and our top tips on how to handle them too.
Please note that this guide has been created for informational purposes only, and should not be relied on for tax, legal or accounting advice. For qualified professional guidance in these areas, please consult your own accounting advisors before you make any decisions.
All the regulations listed in this article are correct for the tax year 2017/18.
If you’re the only owner of your business and there is no legal distinction between you and your business, you are a sole trader. This is the simplest way to run a business, and means you are entitled to keep all profits from your business after tax has been paid. However, whilst cashing in on your profits, as a sole trader you are also liable for all losses which can make it a risky option for businesses that require a lot of investment.
To set up as a sole trader you will need to register with HM Revenue and Customs (HMRC) within three months of beginning trading. Following this application, HMRC will communicate with you about registering for VAT too.
You can also set up your business to run as a private limited company, which means that it is separate from the people who run it. Limited company taxes are different to the taxes you pay on your own salary or personal income so, differing to being a sole trader, it is best to consider you and your business as two separate entities in this case.
To register as a limited company, you will need to complete the incorporation forms online with Companies House.
Which taxes should you be paying?
Both sole traders and salaried individuals/employees at limited companies must pay income tax. As a sole trader, you won’t have to start paying this straight away and will only begin making income tax payments on your business’ profit once it surpasses the personal allowance - which has risen to £11,500 for the 2017/18 tax year.
If you are the business owner of a limited company, you will have to pay income tax on any salary you take from the business. This amount will depend on how much you choose to take, and will be deducted from your salary under the HMRC’s Self-Assessment system. Income tax for limited companies will only apply to your salary if it is over £11,500 you’re under 75 and you have no other income.
If you take a divident from an investment, you only pay tax above the £5,000 Dividend Allowance for the tax year, this is regardless of any non-dividend income. Above this allowance, the tax you pay will be dependent on which income band you fall in to; and you will have to notify HMRC and ask them to change your tax code, or note the details on your Self-Assessment tax return.
Every employee and employer will have a National Insurance number. This is to ensure that all of your National Insurance contributions and tax is recorded against your name only. Your number can be found on your payslip, on your P60, or on letters about your tax, pensions, or benefits. If you have lost your National Insurance number, you can find it here.
If you are a sole trader you will need to pay two types of National Insurance (NI), Class 2 and Class 4. Class 2 NI is set at a flat rate of £2.85 a week, and is payable by anyone earning more than £6,025 a year from self-employment. If you are earning less than this, you can still pay Class 2 NI voluntarily under the Small Profits Threshold; this will aid in protecting your entitlement to State Pension and other benefits such as Maternity/Paternity Leave.
You will have to start paying Class 4 National Insurance once your business profits go over £8,164. The amount you pay will be worked out as a percentage of your business’ profits – which is 9% of all earnings between £8,164 and £45,000, and 2% on earnings above that.
If you are the director of a limited company and you provide a service to the business, then you are considered an employee as you are taking a salary from the business. This means you are liable to pay Class 1 National Insurance as a typical employee would, which is again dependant on how much you earn. You will pay a tax of 12% of your salary if it is between £157 and £866 a week; and 2% if you are earning any higher. Class 1 NI is paid through the pay-as-you-earn (PAYE) scheme. PAYE is not a tax on its own, but simply the method by which HMRC use to collect certain taxes; you can register for the PAYE scheme here.
You will stop paying Class 1 NT on your salary when you reach the State Pension age, which is the earliest age you can start receiving your State Pension. This may be different to the age you can claim your workplace or personal pension.
All limited companies must pay corporation tax, which is due on any profit the business makes. The first step here is to register for corporation tax within three months of beginning business, or restarting a dormant business - if you are a sole trader you will not have to pay corporation tax at all.
The rate of corporation tax can change from year to year, so it’s important to keep up with which figures apply each tax yea. From 2017/18, the corporation tax rate for company profits has fallen from 20% to 19%; so, to calculate the cost of your corporation tax, you can multiply your business’ profits for the tax year by 19%. For example, if your profits were £35,000, you would multiply that figure by 19% and find that your corporation liability is £6,650. Unlike income tax, there is no personal allowance with corporation tax.
Corporation tax is payable nine months and one day after the end of your financial year; and then you’ll have to complete a corporation tax return with the HMRC within 12 months of your year end too. If your business has earnt more than £1.5 million in this time, you will have to pay in instalments. Keep in mind that the tax payment is due before the return is!
Value Added Tax (VAT)
If your business is making more than £85,000 in VAT taxable sales – which are the sales of most products and services in the UK – then you should register your business for VAT. This applies to both sole traders and limited companies. Once registered, your business can charge VAT on these products and services, and you can also reclaim any VAT you’ve paid on business related supplies too.
The standard rate of VAT is 20%, but this may be reduced depending on the product. For instance, a reduced rate of 5% typically applies to goods such as children’s car seats; and a zero rate applies to most food and children’s clothing. Even at 0%, a zero-rate sale is still VAT-able, so you are able to reclaim the VAT on the costs you incurred in making those sales. But if your products are entirely exempt from VAT then you cannot claim these.
Business rates are a little more particular than the other taxes for small businesses. They work like council tax, but for company property instead. Different businesses will be charged different rates because the tax depends on the type of company you run and where it is located. These rates are based upon the rateable value of your property, and will usually apply if you operate your business from dedicated premises, such as having a permanent shop of running your company from an office space.
Alternatively, if you run your business from your home and you don’t have visiting customers or staff, and you haven’t converted any part of your home for dedicated business activity either, then you will most likely not have to pay any business rates.
Do check - and double check - your liability for business taxes regularly, as this will be specific to your business and you don’t want to get caught out by not paying the correct fees!
If you are paying business rates on your company, there are a lot of business tax relief schemes and grants available that you should be aware of too. For instance, from April 2017, you can get small business rate relief if your property’s rateable value is less than £15,000; or if your business only uses one property – you may still be able to get relief if you use more.
Liberis do not provide tax, legal or accounting advice. This guide has been created for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. The information included in this guide is based upon existing legislation for the 2017/18 tax year; however, it is not all inclusive, and should not be relied upon as being all inclusive.
Every effort has been taken to compile the contents of this guide as accurately and carefully as possible. However, Liberis cannot accept any responsibility or liability to any person in respect of anything done or omitted to be done in in reliance, partly or wholly, on any part of this guide.
To make smart financial decisions for your business, you should consult your own accounting advisors before engaging in any transactions.