Small Business Taxes
The taxes you pay and the way that you pay them will be different, depending on whether you are a sole trader, you are in a partnership, or you own a limited company.
Limited companies currently pay corporation tax at 19% on the profits earned. This tax doesn’t apply to sole traders or partners. The amount of tax owed is based on profits after salaries and other business expenses have been paid, but before dividends are withdrawn.
Unlike income tax, there isn’t a tax-free allowance, so companies pay corporation tax on all profits
Each business accounting year will be different, depending on when the company was set up. You must pay your corporation tax bill nine months and one day after the end of your company's tax year.
You could risk an HMRC fine if your tax payment is late, if you file your return after the deadline, or you provide inaccurate information.
Value Added Tax (VAT)
If your annual turnover is more than £85,000 per year your business should be registered for VAT. Sometimes it’s beneficial to be registered, even if you haven’t reached this level.
Being registered means that your customers will pay VAT at 20% on most of the goods and services you provide. However, some things such as children's car seats and home energy have a reduced VAT rate of 5% and others are zero or nil rated.
You will be able to reclaim VAT that you have paid on things you buy for your business, like computers, tools and stationery.
You must send a VAT return to HMRC, even if you don’t have any VAT to pay or reclaim. From 1 April 2019, new Making Tax Digital rules mean that you must keep digital VAT records and submit your VAT returns using compatible software.
If your business has an office, shop, factory or warehouse you will probably have to pay business rates. Even if you work from home you might have to pay business rates in some cases, if you have converted your garage for business, for example.
Business rates are based on the estimated value of your business premises on the open market if sold. The most recent valuations came into effect on 1 April 2017, based on market values on 1 April 2015.
Your business rates are calculated and sent by your local authority. The bill arrives in February or March for the financial year starting on 1 April and you will usually make 10 payments during the year.
Small business rates relief – if your property's rateable value is less than £15,000, and your business only has one site, you might be able to claim business rates relief by contacting your local council.
If you're a shareholder, you can pay yourself in dividends. The first £2,000 is tax-free, but if you receive any more than this, you'll have to pay dividend tax. The rate you pay depends on your income tax band from 7.5% up to 38.1% if you pay additional-rate tax.
If your only income is from dividends, you can use up your personal tax allowance in addition to your dividend allowance. You must include any dividend income in your self-assessment tax return.
Income tax is paid personally if your salary is above your personal allowance. Earnings, including dividends, savings interest or capital gains might need to be included in your income.
If you're a sole trader, you'll pay income tax and National Insurance contributions (NICs) on the profit you make from your business and you will need to submit a self-assessment tax return.
If you're paid by the company, income tax and NICs will be taken through the company's Pay As You Earn (PAYE) scheme.
If your business employs people, you'll need to pay employer's NICs directly to HMRC. Your business might be eligible for the Employment Allowance.
Capital Gains Tax (CGT)
CGT must be paid when you sell something for a profit. For small business owners, it's paid if you sell or give away an asset, shares or your whole company.
The rate you pay will depend on your individual income tax; basic-rate taxpayers pay 10%, while higher- and additional-rate taxpayers pay 20%. If you're selling a property that's not your main home, the rate rises to
18% for basic-rate payers and 28% for higher- or additional-rate payers.
CGT will be paid on the sale price minus the amount you paid, as well as any related investments and costs. It counts towards your income for the year, so a large gain could move you into a higher tax band.
In some circumstances, you might be able to claim entrepreneurs' relief.
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