Understanding business tax

As the great US politician and Founding Father Benjamin Franklin once said: “Nothing is certain, except death and taxes”.

There’s certainly no escaping paying taxes when you’re in business in the UK, unless your business is very tiny indeed. But what taxes might you have to pay and when are they due?

Emily Coltman FCA, Chief Accountant to FreeAgent – who provide an online accounting system for freelancers and small businesses – gives a quick summary of what taxes your business might expect to pay.

Sole trader, partnership or LLP

If your business isn’t a limited company, then you, as an individual, will pay some taxes on your share of its profits. If you’re a sole trader then this would of course be 100% of the profit.

Income tax and National Insurance

Assuming you have no other income, once your share of your business’s profits goes over the personal allowance level (which is currently £9,440 if you’re under 65), you’ll start to pay income tax on your share of the profit.

National Insurance on your business’s profit, which is called Class 4 National Insurance, kicks in sooner – once your share of the profit goes over £7,755 a year.

This tax and National Insurance is payable every year at the end of January, for the tax year that ended at the start of the previous April, and if the bill for both combined is more than £1,000 a year then you’ll almost certainly have to pay some at the end of July too.

Class 2 National Insurance

Class 2 National Insurance is a flat rate of £2.70 per week, and again, it’s payable at the end of January and the end of July each year.

This has to be paid unless your business’s profit is under the small earnings threshold, which is currently £5,725 a year. If your profits are under this level then you can apply to be exempt from paying Class 2 National Insurance. Be aware though, that if you do that then your entitlement to State Pension might be reduced.

Limited company

A limited company is the only kind of business that pays tax on its profits in its own right, and it doesn’t pay income tax, but corporation tax. Its employees will pay income tax on the wages the company pays them.

Corporation tax

Corporation tax is due for payment 9 months after the end of the company’s accounting year.

A company doesn’t pay National Insurance on its profits.

If it pays any dividends to its shareholders then they won’t have to pay National Insurance on that income either.

All businesses

VAT

When a business makes more than the current VAT threshold’s worth of taxable sales within 12 months, or is going to break through the threshold in the next 30 days, then it must register for VAT.

The threshold as from 1st April 2013 is £79,000.

Not all sales are subject to VAT. Some, such as insurance and postal services, are exempt from VAT.

If your business is registered for VAT then you would need to charge VAT on your taxable sales to your customers, and you may be able to reclaim VAT that you pay to your suppliers. You would need to complete a VAT return regularly, usually four times a year, and at the same time add up your VAT charged, subtract your VAT reclaimable and pay the difference over to HMRC.

Staff

If a business employs staff (including, for a limited company, any directors), then it will have to deduct income tax from their wages under the PAYE scheme, and also employee’s National Insurance contributions, and pay that over to HMRC, usually once a month. It will also have to pay employer’s National Insurance contributions to HMRC.

Sole traders, and partners of a non-limited liability partnership, wouldn’t count as employees of a business. There’s no legal difference between a sole trade or partnership and its owners, so legally the owners are the business. The owners of an LLP would also not usually be employees.

If you are in any doubt as to what taxes your business might have to pay then please do speak to an accountant.

*Emily Coltman FCA is Chief Accountant to FreeAgent, who provide an online accounting system designed to meet the needs of small businesses and freelancers. Try it for free at www.freeagent.com

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