Starting your own company involves hours of admin, business tasks, staff questions, and, most importantly, keeping your customers happy. It can be hard to fit in the time needed to look after your small business tax.
If you don’t pay your tax on time, you’ll face substantial penalties; these are best avoided.
Look at it this way: all great business owners are on top of their tax obligations, so the more you know, the better off you’ll be.
So how does tax affect your business? Some of the questions we get asked all the time are:
- when do we have to start paying taxes?
- how much!?
- what’s the difference between corporation tax and self-assessment?
In this post, we’ll cover the essential tax information you need to make running your business easier.
When do I have to start paying taxes?
The current tax year runs from 6 April 2023 to 5 April 2024.
Depending on your business, you’ll have different time frames to pay the taxes you owe.
Limited companies need to pay corporation tax on profits made over the financial year. Your tax bill must be paid nine months and one day after your accounting period ends.
So if your accounting period runs from 1 April to 31 March each year, corporation tax will be due on January 1.
In 2021, the Government announced a corporation tax rate increase for companies with a turnover of £250,000 or more, rising from 19% to 25%.
Smaller companies with a turnover of £50,000 or less will still pay the original 19% corporation tax rate, now known as the small profits rate.
Any companies earning between these two thresholds will pay the main corporation tax rate reduced by marginal relief, which provides a gradual increase in the effective corporation tax rate.
This is a relatively recent change – talk to us if you’re unaware of how this may affect you.
You pay income tax on the money you receive personally, usually through a salary or dividends.
As a limited company director, income tax is paid through your business’s PAYE scheme.
And if you’re a sole trader, you’ll pay income tax based on your business profits, which will be included on your self-assessment tax return.
As a limited company director, you’ll pay National Insurance via PAYE. It helps to pay for your state pension and public services.
For sole traders, National Insurance is calculated as part of your self-assessment return. You’ll need to pay it to HMRC by 31 January each year and as part of your payments on account on 31 July.
VAT-registered businesses must charge VAT on certain goods and services and submit quarterly VAT returns.
When you sell certain goods and services, depending on what they are and how much money you make, will determine whether you must pay Value Added Tax (VAT).
You won’t be registered automatically for VAT, even if your turnover exceeds the £85,000 threshold.
Once over this limit, you’ll have to pay VAT quarterly, with returns submitted to HMRC within 37 days of each period’s end.
Even if you’re not over the threshold, businesses can still sign up voluntarily.
I’m a small business, will my business structure affect when I need to pay tax?
Depending on how your business is set up, you’ll have different tax obligations affecting when you pay tax.
As a sole trader
Remember, as a sole trader, you are your business – that means if your business makes money, that counts as your income.
Sole traders have a tax-free personal allowance of £12,570 If you’re earning less than that, you won’t have to pay any income tax — but you’ll still need to submit a self-assessment tax return.
The current income tax rates are:
- 20% on earnings between £12,571 and £50,270
- 40% on earnings between £50,271 and £125,140
- 45% on earnings over £125,140.
This information must be included on your self-assessment tax return every year, alongside any National Insurance owed.
As mentioned above, you’ll need to register for VAT if your earnings exceed £85,000 in a 12-month period.
Don’t worry about corporation tax – sole traders don’t need to pay this.
As a limited company
Limited companies are separate entities to you as a business owner. A company has its own tax obligations.
Your business must send Companies House an annual tax return, compile statutory accounts, send a company tax return to HMRC, and register for VAT (if your earnings exceed the threshold).
As a director of a limited company, you’re required to submit a self-assessment tax return and pay income tax and National Insurance contributions through PAYE if you receive a salary.
Even if you only receive payment from the company through dividends, you still must complete a self-assessment tax return.
As a partnership
Partnerships have similar tax obligations to sole traders.
Partners must pay income tax on their share of the business’s profits, pay National Insurance, send a personal self-assessment tax return, and register for VAT if earnings exceed £85,000.
The only difference is that a nominated partner must send a partnership self-assessment tax return annually.
As a limited partnership and limited liability partnership
Again, limited partnerships and limited liability partnerships are very similar to sole traders but with some unique responsibilities.
You must send a partnership self-assessment tax return annually and register for VAT if its earnings exceed the threshold.
However, each partner must pay income tax on their share of the company’s profits, send a personal self-assessment tax return, and pay National Insurance.
As professionals, we’re here to help
Hopefully, you’re feeling more confident about your taxes as a business owner after having read this article.
But if you’re still unsure, it’s always best to talk to an expert, like an accountant.
We’re tax experts and business advisers who’ve helped small business owners like you make sense of their taxes.
Get in touch with us, and we’ll help you with your small business tax problems.