Even successful small businesses can have problems if they misunderstand the rules around the tax that they need to pay. Modern business taxation can be very complicated and it is not surprising that so many companies get something wrong – but doing so can lead to a large tax bill down the line and potentially even a fine for making the mistake.
It is important then, to do your research beforehand and get real insight into the taxes you need to pay. Some small businesses function as sole traders and others as limited companies, so we will always try to provide insight into both positions. This will help you to understand you tax obligations regardless of the way your business is set up. So here are the most important types of taxation that every small business needs to know about and understand.
We’ll start with one that isn’t technically a tax – although it is money that has to be made to the government, so it is effectively a tax, it just isn’t officially described as such. If you are operating as a sole trader then you will pay two different sorts of national insurance (NI) and the process can seem a little complex.
First, you pay a weekly flat rate of NI at £2.95 called Class 2 NI (unless your business’ profits are under £6,205, which is known as the Small Profits Threshold). If your profit is under the Small Profits Threshold then you can still opt to pay Class 2 NI on a voluntary basis, as this will protect your entitlement to a state pension as well as providing other benefits. Once your business profits go over £8,424. Known as Class 4 NI, it is worked out as a percentage of your profits.
It is different if you are business is a limited company. If the company pays you more than £162.01 per week you are required to deduct Class 1 employee’s NI from your wages. The company then pays the Class 1 Employer’s NI to HMRC
Income tax is another problem area for business owners. It is relatively simple if you are a sole trader and you don’t have another job: you will pay income tax on your business’ profit as soon as it exceeds your personal allowance of £11,850.
If your business is a limited company you would need to be income tax on any salary or dividends that are given to you by the company – of course this depends entirely on what you pay yourself. As an individual paying income tax on your salary (in this case to your own company) the business deducts it from your salary under the PAYE scheme.
You might think of VAT as something that only individuals pay, before it is a relevant tax for businesses too. Whether your company is a sole trader, a partnership, an LLP or a limited company, making VAT sales of more than £85,000 per year requires you to register the company for VAT. VAT is charged at a standard rate of 20 per cent, but there is also a reduced rate of 5 per cent on some goods and services.
This is an example where sole traders and limited companies have completely different rules governing them. A limited company must pay corporation tax on profits. Unlike in the case of individuals, there is no personal allowance for limited companies. This means as soon as your business makes a profit, you are required to pay corporation tax.
Corporation tax is charged at 19 per cent for all companies and is payable nine months and one day after the company’s accounting year ends. There are a range of potential reliefs and allowances, and businesses often choose to work with accountants with experiencing in planning for corporate tax.
This is another aspect of business tax that can depend entirely on your circumstances. for example, if you run your business for a commercial space or an office then you will be required to pay business rates such as council tax. However, if you are a sole trader who works from home you will not usually need to pay these sorts of business rates.