Getting a business off the ground can be a mammoth operation. Once you’ve come up with your business plan, sourced your start up finance and registered your company, you next need to get your head around the various business and tax laws you need to ensure you’re following so that you don’t end up in hot water further down the line.
Whilst some tax laws are well-known, others are not. In this article, we look at three different tax laws that everyone should be aware of before they start planning a new business venture.
Income Tax Laws
Small businesses in the UK are subject to many different laws on taxes. Whether they apply to you or not will depend on what type of product or service you offer, and how profitable your business is. You must know which ones apply to you when starting a new company because making mistakes and failing to follow all the rules can lead to penalties and fines.
One tax law that every company owner must adhere to, whether they’re a sole trader, partner or corporation, is income tax. All companies have to file income tax returns once a year where they declare their income and show their spending in order that the government can work out their tax liabilities.
Income tax liabilities will obviously differ from company to company. Companies that make larger profits on their earnings will be liable for higher amounts of tax. Sole traders earning less than £11,500 net profit don’t have to pay any taxes, although they will still need to pay a National Insurance Contribution (NIC). If you are earning more than £6025 per year, then you must pay Class 2 NIC which equals £2.85 per week. If your profits fall in the category of £8164 to £45000, it becomes Class 4 NIC which is 9% of the total income.
If your company’s earnings fall somewhere between £11,500 and £45,000 after costs, then you will have to pay a tax of 20% on your primary income. Similarly, if your small business is making a profit ranging from £45,000 to £150,000, then you will end up paying tax in excess of 40%. Once your taxable income and gains exceed the £150,000 threshold, the tax rate becomes 45% of the total revenue.
Corporate Tax Laws
If you are not a small business then chances are the company is registered as a Private Limited Company (plc). The tax paid by limited companies is different from the smaller ones and is known as a corporation tax. It has different rules and regulations from the income tax.
Corporatation tax is a direct tax paid on the profits of a firm before paying the dividends. The tax rate is decided after the gains are calculated including the spending and sale.
Any corporation that is working in the UK – the ones who are conducting business and earning money here, foreign enterprises who have their offices or branches here, and the companies considered to be the resident here for tax – have to pay corporation tax on their final income.
Corporation tax does not have any tax free allowances in the way income tax does, which means that as soon as a company starts making profit they have to pay a fixed amount of tax on that irrespective of any other factors. The tax rate currently is 19% on the total earnings regardless of the income level, but keeps on changing every year based on what the government of the day thinks it needs to be. It will change to 17% at the beginning of the financial year 2020/21.
If a company pays dividends to its shareholders, then there is no tax on the initial £5000, but if it is higher than this value, then it falls under the tax net. Based on the total dividends the tax range is between 7.5% to 32.5% and does not include any personal allowances.
Once the financial year of a company ends, they have to pay their corporation taxes by exactly nine months and one day from the date.
Value Added Tax (VAT) Laws
Irrespective of what kind of venture you have, whether it’s a small sole trader business or a big private limited company, value added tax (VAT) is applicable on everyone whose turnover reaches a certain, specific amount.
Value Added Tax is a consumption tax applied on each item being sold at each stage of its production during the supply chain that increases its value. It is based on the consumption of the taxpaying entity rather than the income they are generating so if a business is not the end consumer they are relieved of any such taxes.
A standard for paying VAT for companies is that if they are generating sales of more than £85,000, then the company has to get itself registered as a VAT business. That company’s products for sale are then known as VAT-able products and therefore have additional costs associated with them. Usually, companies can recover these taxes easily once the VAT-able products are sold.
The VAT standard rate in the United Kingdom is currently 20%, but there are some cases when it is applied at a reduced rate of 5%. In some individual cases, the VAT may even be zero.
Most new ventures want to register themselves as sole traders, and around 60% of businesses in the United Kingdom fall under this category. Being a sole trader can mean fewer complications and fewer tax rules to get to grips with, which in the early days is certainly welcome.
But there are still plenty of tax laws to get your head around, even if you’re starting small. However, know these three main big ones and you’ll have a fair idea how much tax you will be looking at in the first few years, and how much professional help you may need to get to help you ensure you’re fulfilling all of your tax obligations under the law. If in doubt, speak to a qualified accountant or HMRC who will be able to guide you on which tax rules apply to you.
Note: This article is written by one of our Guest Editor based on his knowledge. SPOKEN by YOU wil not be responsible for any false or illegal information in this article