Business Tax Basics

Most business owners start their companies in order to market a product or service to the world, not to deal with the intricacies of tax. Unfortunately, however, neglecting these issues can lead to serious problems for your business down the road.

Corporation Tax

Corporation tax applies to most single companies, and the rate payable varies according to eligible profits. If your profits are below £300,000, you will need to pay 20 per cent in tax. If your profits are more than £1.5 million, you will need to pay 24 per cent. Any business whose profits fall in between these two rates will need to apply for ‘marginal relief’ in order to avoid paying more than necessary. In order to work out your liability, you will need to download a full list of the relevant deductions and allowances which you can apply to your pre-tax profits in order to determine your true taxable profit rate.

Value Added Tax

As well as dealing with corporation tax, you will also need to factor in VAT to many of the transactions undertaken by your business. The standard rate for VAT is currently 20%, and if your turnover exceeds £77,000 you will need to become VAT-registered. This means that you will need to charge VAT for the products you sell, but that you will be able to reclaim the VAT you have paid for products bought. Not all goods and services attract VAT at the standard rate, with some being reduced (to 5%) and some being zero-rated (0%). It is important to understand which of the products you provide attract which VAT rate, and to explore the potential advantages of becoming VAT registered.

Tax For Your Employees

As an employer, you are also likely to be obliged to set up a PAYE system for your employees if their earnings exceed £5,500 per year. This means that you will be responsible for deducting tax and National Insurance Contributions from their pay packets before you send out their salaries, keeping of record of this, and paying it over to HMRC at specified periods. PAYE applies to most payments made to employees, including bonuses, expenses, sick pay and so on. You will not need to institute a PAYE system if all of those working for you are self-employed, or if they earn amounts below the qualifying limit.

Don’t Forget Personal Taxes

If you are a director of a company, rather than a self-employed trader, don’t forget that you need to pay taxes on any salary that you award yourself! If you spend at least 183 days in the UK during the tax year, or if you meet various other qualifying criteria, you will need to pay personal income tax. This is currently set at 20 per cent for incomes between £8,105 and £35,000, 40 per cent on income over £35,000, and 50 per cent on incomes over £150,000. This latter rate, however, has been abolished from the 2013 tax year onwards.

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