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Small Business Tax – What You Need to Know

Andrew Laurie2
16 May 2019

Small Business Tax – What You Need to Know

By Andrew Laurie, tax manager

At the onset businesses may find they are making losses with all the start up cost but with growth that loss can soon turn into a profit, and it’s almost inevitable that you will have to start paying taxes. And, as time goes by and your business grows, it can become increasingly challenging to keep track of the tax due.

It can get even more complex as in the UK, small businesses can be subject to various different types of tax – it all depends on your business activities, performance and structure.

Knowing which tax you are liable to pay is essential when starting up a business venture, no matter how small. Missing relevant tax deadlines can not only lead to hefty fines, but also interest charges which accumulate overtime.

Do you need to pay VAT?

If as a business your taxable supplies and services exceed the VAT threshold of £85,000 (2019/2020) within a rolling 12-month period, then you will need to register for VAT with HMRC. Once you register, you will receive a VAT certificate with your own VAT number.

From the date of registration, as a business you will need to charge the right VAT amount, which, in most circumstances, is the standard rate of 20%. It’s vital to keep detailed VAT records

What tax do you need to pay as a sole trader?

In addition to VAT, you will also need to pay income tax on your enterprise’s taxable profits if your annual turnover goes over £12,500 (2019/2020). However, this threshold is variable, depending on individual circumstances.

You also must pay your national insurance contributions (NICs). If your business generates more than £6,365 (2019/2020), you need to pay a flat-rate of £3 per week (2019/2020) along with your income tax. If your taxable profits exceed £8,632 (2019/2020), you will also need to pay an additional tax known as class 4 NICs, calculated as 9% of income between £8,632-£50,000 or 2% for income above £50,000 (per 2019/20).

What taxes do partnerships and private limited companies need to pay?

If your business is a partnership, you will need to pay income tax based on your share of profits once you exceed the £12,500 threshold (2019/2020). You will also be liable to pay both class 2 and class 4 NICs.

If your business structure is that of a private limited company, you must pay corporation tax on the profits of the business. The current rate is 19% but this due to decrease to 17% in 2020.

If you’re an employee of the company, you will need to pay income tax and NICs via the company’s PAYE scheme. If you’re a shareholder, you will need to pay corporation tax based on the company’s profits following your registration with HMRC for corporation tax.

What business rates are you subject to?

Whether you’ve already kick-started your small business venture or you’re still considering the possibility of taking the plunge of starting your own company, we can provide you with the advice tailored specifically to your own situation.

The world of taxation is a broad field of regulations which may apply to certain businesses and not others, and this can often be a convoluted process for many of our clients, regardless of how long they have been in business.

If you would like further clarification on a particular issue you have on your mind or you are in search for further information, do get in touch - a specialist member of our team will guide you in the right direction.

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