Navigating your taxes as a small business may seem daunting. From Corporation Tax to National Insurance, there are various taxes you need to be aware of, depending on the size of your business and your profit margins.
If you are operating your small business as a sole trader, then you will need to pay income tax. You will be required to pay income tax on your business’s profit once your earnings go over the personal allowance, which changes each year. Check HMRC to see how much the personal allowance is on any given year.
As a sole trader, you can pay your income tax by self-assessment each year.
PAYE (Pay As You Earn)
PAYE stands for Pay As You Earn, and is operated by HMRC as a means of taking income tax directly from employee salaries. If you are paying income tax as a sole trader, PAYE will not affect you. However, if you are running a limited company, your company can deduct your taxes from your salary under the PAYE scheme, as you are technically an employee of your own company.
Unlike income tax for sole traders, payroll data for PAYE must be submitted to HMRC in real time, not once a year. It is a good idea to seek professional advice when it comes to PAYE to ensure that you are meeting all your legal obligations.
If you are running a limited company, you must pay corporation tax on your taxable income and profits. To do this, you will need to calculate your own tax liabilities. Unlike income tax, there is no personal allowance when it comes to corporation tax. If you are operating as a sole trader, you do not need to pay corporation tax.
VAT (Value Added Tax)
Certain goods and services are subject to VAT. If your small business makes sales above the current VAT registration threshold, you must register for VAT, regardless of whether you are a sole trader, limited company or partnership. Check with HMRC to see if you are meeting your obligations. There are several different tax rates for VAT, but the standard rate is 20%.
If you are required to register for VAT, remember that you must submit your VAT return online, and pay your tax electronically. A flat rate VAT scheme exists that may be a better bet for your business, allowing you to pay a fixed percentage of your gross turnover. Check with an accountant to ensure that you are paying the legal minimum so you can make the most of your business.
National Insurance, although not exactly a tax, affects small businesses in much the same way. It is deducted from earnings in order to fund state benefits such as the NHS and the state pension. You must pay National Insurance Contributions (NICs) no matter if you are a sole trader, limited company or partnership.
There are two different kinds of NICs for sole traders – Class 2 and Class 4. Unless your business profits fall under the Small Profits Threshold, you will have to pay NICs, but the amount varies depending on their income. If you are not obligated to pay, you may choose to do so voluntarily in order to remain entitled to certain state benefits. You will only be required to pay Class 4 NICs if your profits go over a certain amount. Check with HMRC to see if you are meeting your obligations.
If you are operating as a limited company, you are required to pay Class 1 NICs on your earnings, and your limited company is also obligated to pay Class I NICs as an employer.