With so many factors vying for your attention when you start a business, reading up on your tax requirements can often take a back seat. However, with substantial penalties on the table for those who put off paying their taxes, making sure you’re aware of when your business needs to start paying tax is essential.
Starting from scratch
If you’re starting your own business from scratch, you need to decide on a company structure which best suits your business model. Tax is one factor that needs to be taken into consideration, as well as the amount of responsibility you want placed on you as an individual.
A key factor to consider is the level of risk in the industry you plan to enter. Entrepreneurs who are looking to enter a high risk market often decide to set up a limited company, to avoid putting their personal finances in jeopardy.
Forming a company also gives you the option of taking out dividends rather than having a salary. Dividends avoid National Insurance charges and as of 6 April 2016, you no longer have to pay tax on the first £5,000 of dividends that you receive in the tax year. However, you’re not automatically taxed at a higher rate on a salary. The most common way directors of limited companies pay themselves is using a mixture of salary and dividends.
If you are taking dividends, you don’t necessarily do so when filing your tax return. As a limited company owner you’re free to distribute dividends as often as you like, whenever you like, as long as they don’t exceed your profit and you complete the necessary paperwork. It’s always best seeking expert advice from an accountant or financial advisor if you’re not sure which route to take.
However, if you’re planning on entering a field that’s less risky, you may find it more beneficial to set up as a sole trader. You can then take your business profits as salary, which would be subject to the usual Pay As You Earn (PAYE) tax.
Working out your company’s tax status
Your company’s tax status depends on what type of business you run. This will also determine when you need to start paying tax.
If you are a sole trader, you run your own business as an individual. Being a sole trader doesn’t necessarily mean you don’t employ any staff, simply that you’re solely responsible for any losses your business makes, and are likely to keep all your business’ profits after tax.
As a sole trader, your tax responsibilities are:
- Sending a self-assessment tax return annually
- Paying income tax on your business’ profits
- Paying National Insurance
- If you expect your takings to exceed £83,000 in a rolling 12 month period, you will also need to register for Value Added Tax (VAT)
If you run a limited company, you will have set up an organisation to run your business. The company is responsible for everything in its own right, and its finances are separate to your personal finances. This means any profit made is owned by the company after it pays corporation tax.
If you run a limited company, your annual tax responsibilities are:
- Send Companies House an annual return
- Compile statutory accounts
- Send HMRC a company tax return
- Register for VAT if you expect takings to exceed £83,000 in a rolling 12 month period.
In addition, if you’re a director of a limited company, you need to:
- Fill out a self-assessment tax return annually
- Pay tax and National Insurance through the PAYE system if you receive a salary
If you run a limited company, you also have the option to combine your Companies House accounts and annual tax returns and submit them together, rather than separately, via HMRC’s website.
Ordinary business partnership
Ordinary business partnerships are when you and one or more other people share responsibility for your business. You’ll share all your business’ profits between the partners who will all pay tax on their takings.
The tax responsibilities for the partners of an ordinary business partnership are:
- Pay income tax on your share of the profit
- Pay National Insurance
- Send a personal self-assessment tax return
- Register for VAT if you expect takings to exceed £83,000 in a rolling 12 month period
In addition, a nominated partner must send a partnership self-assessment tax return each year.
Limited partnership and limited liability partnership
Although responsibility for business debt differs depending on whether you run a limited partnership or a limited liability partnership, the tax responsibilities are the same. As a partner of a limited partnership or a limited liability partnership, your tax obligations are:
- The partnership is required to send a partnership self-assessment tax return to HM Revenue and Customs (HMRC)
- Register the partnership for VAT if the business is expected to make more than £83,000 in a rolling 12 month period
All partners are required to:
- Pay income tax on their share of the partnership’s profits
- Pay National Insurance
- Send a personal self-assessment tax return annually
When to start paying tax
The current tax year runs from 6 April 2016 to 5 April 2017. HMRC must receive your tax return and any money you owe by certain deadlines, or you’ll have to pay a penalty. The following deadlines apply for self-assessment tax returns for the current financial year:
- Registering for self-assessment – 5 October 2016
- Paper tax returns – 31 October 2016
- Online tax returns – 31 January 2017
- Paying the money you owe – 31 January 2017
If you are a sole trader, you will complete a self-assessment tax return to calculate your tax bill. You’ll receive the same personal allowance as an employee, which means for the 2016-17 tax year, you don’t need to pay tax on the first £11,000 you earn.
As a sole trader or partner, you can also claim capital allowances when you purchase assets for your business, such as machinery or equipment. This will reduce the amount you’ll have to pay in tax.
If you run a limited company, you must pay your Corporation Tax nine months and one day after the end of your accounting period. Your accounting period is usually the financial year covered by your annual accounts.
If you run a limited company, any foreign company with a UK branch, or a club, co-operative or any other unincorporated association, you need to pay corporation tax on your business’s profits.
You won’t receive a bill for your corporation tax, so it’s often worth hiring an accountant to ensure you don’t miss payments and to keep your accounting records. Profits subject to corporation tax include money your company makes from doing business, investments and selling assets for more than they cost.
If your business employs staff, you’ll need to run a PAYE scheme. This is the system you use to take income tax and National Insurance contributions out of employee wages before they’re paid.
An employee’s tax code will tell you how much tax to deduct from an individual’s wage.
National Insurance contributions qualify employees for certain benefits, such as their state pension. Contributions are paid along with income tax. As an employer, you will deduct Class 1 National Insurance from your employees’ wages. If you’re self-employed, you pay Class 2 and Class 4 National Insurance depending on your profits. You can do this through your self-assessment tax return.
Usually, you’ll be required to pay your VAT bill by the deadline shown on your VAT return. If you use the Annual Accounting Scheme or payments on account, you may have different deadlines so it’s important to double check.
You need to ensure your VAT payment will reach HMRC by the deadline or you’ll have to pay a surcharge. If you’re unsure as to when your VAT deadline is, you can use an online VAT payment deadline calculator.
The current VAT rate in the UK is 20 per cent. You need to register for VAT if your business turnover is greater than £83,000 in a rolling 12 month period.
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