A guide on business taxes for the uninitiated
With a new business comes new tax responsibilities, which can be overwhelming if this is your first time.
To assist you, we've put together this quick guide to the most common types of business taxes, how to pay them, and what you can do to stay on top of it all.
So let's get started!
Businesses must pay taxes.
Taxation on earnings
Profits from your business will be subject to income tax. Your business structure will determine how you pay it.
If you're a sole trader with no other source of income, you won't have to pay income tax until the profit of your business exceeds your personal allowance (currently £11,850).
If you run your business as a limited company, you'll have to pay income tax on any salary or profits you receive.
If you have a second source of income, you may be able to begin paying income tax sooner. The Pay As You Earn (PAYE) programme will deduct it from your salary (either from your employer or from your limited company).
Taxes on Corporations
If your business is a limited company, you must pay corporation tax on its profits. For all businesses, the corporate tax rate is 19 percent.
There is no personal allowance for a company, unlike income tax, so you'll have to start paying corporation tax as soon as you start making money. It must be paid nine months and one day after the conclusion of your fiscal year.
What is the distinction between company tax and income tax in the United Kingdom?
Your company's profit will be subject to corporation tax. Your personal income will be subject to income tax.
Your personal and business money will be kept separate as a limited corporation. Corporation tax is not paid by sole traders.
Is it a smart idea to convert to a limited liability company?
You must register for VAT once your annual turnover surpasses £85,000 pounds. Whether you're a solo trader, a limited company, a partnership, or an LLP, this is true.
Rates for businesses
Any office or retail space where you operate will be subject to business rates. It's similar to paying council tax on your commercial property.
There are a couple of exceptions to be aware of. Farm structures, for example, are free from paying commercial rates. Business rates relief is available for a variety of properties.
You won't have to pay business rates or council tax if you operate from home unless:
- You have employees who work from home as well.
- Customers who come to your house buy goods or services from you.
- You've made your housework for you.
- Your house is both a business and a home (e.g. you live above a pub)
If you work from home, you will almost certainly qualify for tax relief. In the KashFlow guide to working from home, we go over all of this in detail.
Best tax management advice
It's exhausting to run a small business. For the first time in your life, you're handling marketing, promotions, networking, business negotiations, sourcing raw materials, conducting price and competitor research, balancing the finances, checking inventory, and who knows what else.
Because so much work is put into the day-to-day operations of a business, crucial but "out of sight" tasks like tax can sometimes be overlooked until the last (stressful) minute. You may experience a mental barrier when attempting to comprehend the various forms of taxes.
Prepare ahead of time.
Planning ahead and budgeting for your tax payment is one approach to ensure you have the money to pay it. This is a fantastic way to keep track of your cash flow throughout the year.
Once you understand your company's tax requirements, creating a plan that incorporates your estimated tax liability is pretty simple. Using online accounting software like KashFlow allows you to keep a closer eye on your finances and verify that you're sticking to your budget throughout the year. Because your numbers are already in place, it makes submitting your tax returns at the end of the year much easier. Find out more.
Maintain your organisation.
Even in a fledgling firm, a lot may happen in a month, so keeping track of your funds as you go is a good idea.
This also means that by the end of the financial year,
you'll have completed the most of the job and won't have to waste time looking through mounds of old paperwork and receipts. All you have to do now is double-check your numbers and submit your paperwork.
Additionally, sending monthly updates will be required to maintain compliance with Making Tax Digital beginning in 2020. In our Making Tax Digital Hub, you can learn more about MTD.
If you require assistance, contact an accountant.
It's far preferable to have someone double-check your work or give you advise before you go too far down the incorrect road. Regardless of how cautious you are, technical glitches might arise and take you off guard.
If you're unsure, it's better to ask a professional to double-check or assist you with filing your business tax forms. They may also be able to assist you with any audits that you may have.
Here's where you can find an accountant.
Keep track of everything.
As a general rule, retain tax records for at least three years after the relevant fiscal year ends. Unfortunately, many businesses are unaware of this, and they find themselves scrambling to locate or duplicate documents on demand.
It's also worth noting that any tax records pertaining to property or real estate must be retained for at least three years after the property or real estate has been sold or disposed of.
Steps to take next
While not exhaustive, this article should provide you with a better understanding of the various sorts of business taxes you'll encounter when running your own company, as well as how to best prepare yourself when they do.
So, where do we go from here?
If you go to the KashFlow blog, you'll find a plethora of articles on various aspects of tax and corporate finance (as well as HR and Payroll).
If you're using KashFlow (or considering it), you should also check out our Knowledge Base, which is essentially a handbook on operating your business with the help of our cloud bookkeeping software.