One of the biggest challenges faced by those setting up a new business is negotiating and understanding the complex UK tax system. David Marples, Federation of Small Businesses sets out the four main taxes that you need to be aware of.
Income – Sole Traders & Partnerships
As a sole trader, you can keep all your business’ profits after you’ve paid tax on them. If this is your only income, you’ll begin to pay income tax on your business’ profit once it goes over the personal tax allowance, which is £10,600 for the 2015/16 year if you’re under 75 (unless your taxable income is above £100,000). It is important to note that you must declare your taxable profit to HMRC on an annual basis under the self assessment system and also pay the tax due by 31 January following the year of assessment.
Being a ‘sole trader’ does not mean that you can’t hire staff but if you do so you need to establish whether these should be classified as employees or self employed workers. Furthermore you’re responsible for the business and you are personally responsible for any losses your business makes.
The income tax rules for partnerships are broadly similar to those for sole traders. Once it has been agreed between the partners how the income is to be spilt, each is then taxed on that income in the same way that a sole trader would be taxed.
Corporation – Limited Companies
If you chose to operate as a Limited Company rather than as sole trader, you pay corporation tax. Again you are required to submit an annual Tax Return to declare the taxable profits. Corporation tax is paid on a company’s taxable profits but if the business has previously made losses, these can be written off against the profits of the same business.
The level of corporation tax is currently set at 20 per cent for all companies, and it is payable nine months and one day after the company’s accounting year end. At the Summer Budget 2015, the government announced legislation setting the Corporation Tax main rate at 19% for the years starting the 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020.
PAYE & National Insurance (NI) – if the business has any employees; this would include the Director(s) of a Limited Company
Pay As You Earn (PAYE) is the method of paying Income tax and National Insurance (NI) to the government.
If you’re a sole trader you don’t need to worry about PAYE unless you have any employees . However, if you are a director of your own Limited Company, you will be taxed as an employee of that Limited Company. This means that you will need to operate PAYE on the salary paid.. If you have other employees, PAYE will also need to be paid from their wages.
You will also need to give consideration to any Benefits in Kind provided or other payments made to employees as these can give rise to tax and NIC liabilities.
Capital Gains – if assets are being sold or on incorporation of a business
If you decide to sell all or part of your business you may be able to pay less Capital Gains Tax through Entrepreneurs’ Relief. As long as you meet the criteria, you could save money if you sell your business and the assets used for the business, such as the company’s premises. It would be recommended to seek advice in this regard prior to completing and transactions.
As with all tax matters, what is important is to ensure you have a paper trail, so keep all your receipts, invoices, and most importantly a record of income, expenses and a set of accounts to ensure you can back up any claims. It’s also important to make sure that you are fully aware of HMRC deadlines so as to avoid penalties.
In terms of more complex considerations, the problem is that where tax is concerned the devil is in the detail and so it is difficult to condense anything to a short word count let alone a complex issue.