By law, you must register your new business, but first, you must decide which legal structure is best for you. Whatever your choice, find out which taxes you’ll pay.
The legal structure you choose will have an impact on how much tax you pay and determine how much control and responsibility you have over the business.
You should consider the following factors:
As a sole trader, you pay Income Tax on your business’s taxable profits. This is calculated each year by you or your accountant when completing and filing your Self Assessment tax return, detailing your business sales revenue and outgoings after your tax allowances are taken into account.
The standard tax-free Personal Allowance (for 2017/2018) is £11,500, and you won’t pay any income tax until you earn more. This threshold figure will be higher if, as a basic rate taxpayer you claim a Marriage Allowance, or lower if your total taxable income is more than £100,000.
Sole traders also must pay National Insurance contributions (NICs). If your sole trader business makes more than £6,025 a year (2017/18), you must pay flat-rate Class 2 NICs (£2.85 per week in 2017/18) at the same time as your income tax (ie after completing your Self Assessment tax return). From April 2018, Class 2 NICs will be abolished.
If your sole trader business makes annual taxable profits of more than £8,164 (2017/18), you’ll also have to pay Class 4 NICs (9% on £8,164-£45,000 profit and 2% thereafter). This is also payable at the same time as your income tax and Class 2 NICs.
As an employee, you pay income tax and NICs through the company’s PAYE (i.e. pay as you earn) scheme. Your limited company must pay employer’s NICs at 13.8% on employees with wages more than £157 per week
As a company shareholder, you can pay yourself dividends (providing enough cash is available). You don’t pay any tax on the first £5,000 of dividend payments, but you must pay tax if you pay yourself anymore. Determined by income tax band, the basic rate payable is 7.5%, the higher rate is 32.5%, while the additional rate is 38.1%. Dividends that fall within your Personal Allowance don’t count towards your £5,000 dividend allowance.
You must pay your company’s Corporation Tax bill within nine months and a day of the end of your accounting period (companies with profits of more than £1.5m can pay in instalments) - calculate your Corporation Tax deadline.
You or your accountant must file your company’s Corporation Tax return within 12 months in accordance with HMRC requirements, as well as calculate how much corporation tax is payable.
Members of an ordinary partnership are usually self-employed and taxed accordingly, with income tax payable on their share of any profits after deduction of their personal allowances and other forms of taxable income are taken into account.
The standard tax-free Personal Allowance is £11,500 (2017/2018) and no income tax is due until you earn more. Then:
As with sole traders providing turnover, thresholds are met, partners must also pay Class 2 and Class 4 NICs at the same time as they pay income tax after they’ve completed and filed a Self Assessment tax return.
Non-corporate limited liability partnership members are taxed in the same way as partners, with income tax payable on their share of any profits, plus other taxable income and after any personal allowances are taken into account. If turnover thresholds are met, LLP members must also pay Class 2 and Class 4 NICs at the same time as they pay income tax, after they have filed a Self Assessment tax return.
You pay business rates for use of commercial properties such as shops, offices, warehouses, industrial units, factories, etc.
You won’t pay business rates for using a small part of your home for business, for example, a spare room as an office. However, if you make significant alterations to your home for commercial reasons or sell products or services to visiting customers, business rates are payable.
Local councils send business rates bills in February or March each year for the tax year to come.
The Valuation Office Agency (VOA) decides the property’s rateable value and your local council works out your business rates bill from this valuation. If you qualify for business rates relief, it will reduce your bill, but this isn’t always applied automatically, you might need to apply. If you have any questions about your business rates bill, get in touch with your local council. If you think your rateable value is wrong, contact the VOA.
When your gross VATable year-to-date turnover reaches £85,000 (2017/18), you must register for VAT with HMRC (most businesses register online).
After registering, you’re sent a VAT registration certificate, showing your VAT number, the date you went over the threshold (i.e. your “effective date of registration”) and the date when you need to submit your first VAT return and make your first VAT payment.
From your effective date of registration, your business must charge the appropriate amount of VAT (in most cases this is the standard rate of 20% although some goods are subject to 5%, others are zero-rated or exempt).
You must hold and pay any VAT you charge to HMRC, after filing your VAT returns. You will need to keep detailed VAT records. Your business can reclaim VAT paid (possibly including VAT paid on purchases before you registered).
AAT Essentials are one-day finance training programmes ideal for business owners who are looking for a better understanding of key financial processes. Finance for non-financial managers will help you to understand basic financial documents used in business.Read more
If you're still not sure whether to register as a sole trader or a limited company, it's worth speaking to a finance professional. Use our find an accountant service to find one near you.Read more
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