Businesses must manage taxation rightly. It is hard for a small business owner in the UK to keep track of the different types of taxes and tax rates affecting his business, especially when starting up. Knowing what constitutes his tax liability towards HM Revenue and Customs (HMRC) is a challenge. Missing tax deadlines can result in a hefty fine plus interest on unpaid tax liability. If you are starting your own business, you inevitably have to indulge in taxation related matters at some point. If you are starting up, you can adopt any of the following three business structures:

  1. Limited company
  2. Sole trader
  3. Business Partnership

UK business

Small businesses in the UK are subject to various taxes depending upon business structure. This article attempts to cover all such taxes.

  1. Taxation of Limited Company:
    • Corporation Tax

Corporation tax is applicable on:

  • A limited company
  • UK branch or office a foreign company
  • A club, co-operative, or other unincorporated associations.

Thus, if you are a sole trader, you are not required to pay corporation tax in the UK. This tax is paid on the business profits and calculated as a percentage of taxable income after deducting the allowances, tax relief, and expenses from business income. Taxable profit includes:

  • Trading profits
  • Investments
  • Selling assets above the cost

The company has to work out its Corporation tax itself and then file a return to HMRC and make payment accordingly. This payment of tax becomes due after nine months from the end of the business’s accounting period. Unless a company has suffered from losses previously, it immediately becomes liable to pay the Corporation tax as soon as it makes a profit. The tax return is to be filed within 12 months of financial year-end.

The corporation tax rate is 19% for 2019/20 and 2020/21.

  1. Taxation of a Sole Trader (or self-employed)
    • UK Income Tax

A sole trader is liable to pay UK income tax on the business’s taxable profit. If you are not earning any other income, your liability arises when your business profit exceeds the personal allowance, i.e., £12,500. The personal allowance is high, where the taxpayer claims marriage allowance or blind person’s allowance. It’s smaller where income exceeds £100,000.

The personal allowance shall be reduced by £1 for every £2 of adjusted net income exceeding £100,000. Thus, your personal allowance is zero if income is £125,000 or above.

Income Tax Bands:

Income Tax BandsTaxable incomeTax rate
Personal allowanceUp to £12,5000%
Basic rate£12,501 to £50,00020%
Higher rate£50,001 to £150,00040%
Additional rateover £150,00045%

If you live in Scotland, income tax bands are different.

If you are earning some other income also, for example, salary, then income tax will be deducted from your salary by the company. Income tax is collected thru PAYE (Pay As You Earn) and submitted directly to HMRC by the 22nd of every month.

  • National Insurance Contributions (NICs)

National insurance (NI) is paid to the government to qualify for certain benefits and state pensions. Sole traders are liable to two types of National Insurance

  • A flat rate of £3.05 per week, known as Class 2 NI, provided business profits are above the threshold limit, i.e., £6,475 (2020/21), and
  • Class 4 NI, where the business’s profits lie between £9,501 and £50,000, at 9% and 2% on any further profits of over £50,000.

A sole trader, whose business profits are below the threshold, may also pay Class two NI voluntarily to secure the entitlement of benefits and state pensions.

Having a limited company that is paying you as well, the tax liability of the company and employe will be as follows.

  • Class 1 employe’s NI deducted from wages and paid to HMRC.
  • Class 1 employer’s NI payable by the company unless it is covered by employment allowance.

From April 2019, the rate of National Insurance is set at 12% for pay between £9,501 to £50,000 plus 2% for any amount of pay above £50,000.

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  • Value-Added Tax (VAT)

A small business selling goods and services becomes eligible to Value Added Tax (VAT) liability. Most products and services sold in the UK are covered under VAT; however, there are some exceptions also such as publications.

If your business is making VAT-able sales of greater than £85,000 a year, you’ll need to register your company for VAT.

The current rate of VAT is 20% that is set as a standard for the last 20 years with a reduced rate of 5% for some goods and 0% for some exceptional goods.

To identify the list of items that are exempt or partially charged, kindly visit

https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services

  1. Taxation of Partnerships

The taxation of partners is similar to the taxation of a sole trader. Partners are liable to pay income tax on the share of profits, including other taxable income after deduction of the personal allowance. Partners shall also pay Class2 and Class 4 NI along with income tax (see “Taxation of sole traders”).

Business Rates

Depending on the location and type of business, one may be subject to business rates.

For businesses, that is being operated from a destined office or dedicated premises, business rates apply just like Council tax. The tax rates may differ for various companies, along with a variety of tax relief schemes and grants.

For owners running a business from home, they are not generally liable to pay business rates and also council tax. However, there are some exceptions:

  • Retaining staff that is required to come and work at your home.
  • Selling products or services to customers from home.
  • Converting a part of your home to a permanent workplace.
  • Your property is partly business owned and partly self-owned; for example, you have a shop and live above it.

Conclusion

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If you are working out your tax liabilities and do not want to lose your focus from your primary business activities, you should outsource your tax function to professionals around you. Small business accountants in Walsall can be reached to avoid taxation related headaches.

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