Navigating the UK’s complex tax system can be difficult and overwhelming for most new startups. There are many rules you need to know about and which ones apply to your business.
To avoid costly mistakes down the road, London accountants BrooksCity, recommend you start by getting familiar with the basics early on so you know what to expect ahead of time.
If you fail to meet your tax obligations and deadlines you risk facing hefty fines and penalties. In turn, this can put your business in financial trouble.
If you’re in doubt, seek help from a trusted professional and be proactive instead of reactive when it comes to your startup taxes.
On that note, here are 5 small business taxes you should be aware of.
1. VAT
With the introduction of Making Tax Digital for VAT as of April 1st 2019, it’s important to understand your sales tax obligations.
Recurring issues startups face when it comes to VAT are not knowing when they need to register and the implications of MTD.
In short, if you make more than £85,000 in taxable turnover each year you have to register for VAT. That is regardless of the type of business you operate – limited company, sole trader, partnership or LLP. You shouldn’t charge clients VAT unless you’ve registered.
The current UK standard VAT rate is set to 20% while some goods and services have a reduced rate (5%), a zero rate (0%) or are “exempt”.
Under MTD, you must keep digital records and submit your returns to HMRC using MTD-compatible accounting software.
2. Corporation Tax
Corporation tax is the tax payable on the profits of your limited company. It also applies to unincorporated associations, some clubs and membership associations.
Sole-traders, partnerships and LLPs are instead taxed through the Self-Assessment as self-employed individuals.
The current corporation tax rate is set to 19% and applies to all companies. You will have to pay your corporation tax bill 9 months and one day after the end of your accounting period.
Also, you’ll need to file Statutory Accounts with Companies House. These have for purpose to show the financial actions the company took during the year. The deadline to file your accounts is 9 months after your fiscal year-end.
3. Business Rates
In the UK, business rates are a tax on the right to occupy commercial property. So, if you plan to operate your business from an office or retail space then you might have to pay business rates.
On average you should expect to pay around 50% of your annual rent as a business rate. If you want to find out exactly how much you can follow the steps outlined here.
Some buildings are automatically exempt, such as farms, while others are eligible for a discount. Also called “business rate relief”, for which you’ll need to contact your local council to see if you can apply.
If you plan to launch your startup from home, you usually don’t need to pay business rates but keep in mind some exceptions apply.
4. Income Tax
If you opted to start up as a sole-trade you still need to pay tax on your business profits. But, you will only pay income tax on profits above £12,500 which is your “personal allowance”. This is assuming you don’t have any other sources of income such as a salary from a job.
If you run a limited company, you will need to pay income tax on the salary and dividends you take from the business.
The amount of tax you will need to pay depends on how much you decide to take out. Also, you’ll only need to pay if your salary is above your tax-free allowance of £12,500.
5. National Insurance
National Insurance (NI) contributions are a tax on earnings that build your entitlement to certain benefits and state pension. As a sole trader, you will be subject to two kinds of NI.
The first being Class 2 which is a flat rate of £3 per week if your profits are £6,365 or more per year. If your profits fall below you won’t have to pay but you can choose to voluntarily do so.
Once your profits reach £8,632 or more per year you will also have to pay Class 4 NI which varies according to your profits.
If your business is a limited company, you will pay Class 1 employee NI if you earn £166.01 or more per week. In addition, the company will pay Class 1 employer NI. The company will collect and remit both sums to HMRC.
