In the United Kingdom, small businesses face a number of taxes that they must pay. It is also important that you understand which legal structure is best suited for your small business before registering your new business. Small businesses in the UK are subject to a number of taxes, depending on the performance of your business and the activities it carries out. With so many complicated tax rules currently in place in the UK, it can be difficult to know exactly which ones apply to you or your new business. This article outlines the main taxes and tax rates that small business owners should know.
In this article:
- Choosing the best legal structure for your new business
- What taxes do sole traders pay?
- Which taxes do limited companies have to pay?
- How Partnerships are taxed
- Which taxes will affect your UK Company?
- When should you register for VAT?
Choosing the Best Legal Structure for Your New Business
There are many forms of business entities such as sole proprietorships, limited liability companies, partnerships, and corporations. The structure you choose can greatly affect the way you run your business, impacting everything from liability and taxes to control over the company. This is why it is important to know which structure gives your business the most advantages to help you achieve your organizational goals. You should consider the following factors when it comes to the UK tax system:
- Consider your business’s financial needs, risk and ability to grow
- Consider the level of personal and financial risk you are willing to take
- Consider the perceptions and opinions of customers, investors or funders
What Taxes do Sole Traders Pay?
If you plan to run a sole proprietorship, you need to have a firm understanding of sole trader tax requirements. As a sole trader, your income tax is based on the profits of your business. You will start paying income tax once your profit goes above your personal tax allowance, which is £12,500 in 2019/2020. Sole traders pay two kinds of NI (National Insurance Contributions). Sole traders pay NICs from their income in the form of Class 2 and Class 4 NICs. Class 2 NICs are £3 per week in 2019/2020 per week and payable by anyone earning more than £6,365 per year. Class 4 NICs are paid on profits you make as a sole trader and are calculated at 9% of all earnings of £8,631 and 2% on earnings above £50,000.
Which Taxes do Limited Companies Have to Pay?
A limited company can be considered as a tax-efficient business structure as they currently pay corporation tax on their profits of a flat rate of 19%, which will further reduce to 17% in 2020. A limited company has to pay NICs at 13.8%, for every salary amount an employee earns above the weekly NICs which is wages more than £166 per week. Directors of a limited company are taxed on earnings via PAYE and are also required to complete tax returns.
If you make profits after paying corporation tax as a limited company, this can be distributed to the shareholders of the company in the form of dividend payments (You do not have to pay any tax on the first £2,000 of dividend payments). The basic rate payable is 7.5%, the higher rate is 32.5%, while the additional rate is 38.1%. The corporation tax bill is payable within nine months and one day after the company’s accounting year ends.
Read More: Multiple Ways To Save On UK Tax
How Partnerships are Taxed
Ordinary partnerships are taxed on their share of the profits of the firm for the tax year, and they are usually self-employed. Tax is payable on the profits, which is divided up between the partners according to the profit-sharing agreement. The standard Personal Allowance is £12,500, which is the amount of income you do not have to pay tax on.
Partnerships have a personal allowance of £10,000 on which they pay no income tax. Then they pay the 20% basic rate of income tax on the next £31,865 of profits, the higher rate of 40% on taxable income between £31,865 and £150,000, and the additional rate of 45% on taxable income more than £150,000.
Partners also pay class 2 NICs which are paid at a rate of £2.75 per week and Class 4 NICs are based on the partner’s earnings. Non-corporate limited liability partnership members must also pay Class 2 and Class 4 NICs at the same time as they pay income tax.
Which Taxes will Affect your UK Company?
Small businesses in the UK are subject to a wide array of taxes such as Corporation Tax, VAT, National Insurance Contributions (NIC’s) and Pay As You Earn (PAYE). Local councils send business rates bills in February or March each year for the tax year to come. In order to estimate your UK business rates, you multiply the “rateable value” by the appropriate “multiplier” which is set by the government. The Valuation Office Agency (VOA) provides valuations and property advice to support taxation and benefits to the government and local authorities in the UK. Your bill can be reduced if you qualify for business rates relief, but you might need to apply for this as this isn’t always applied automatically.
When Should you Register for VAT?
No matter what kind of business you have, if your business makes VATable sales of more than £85,000 a year, you will have to register your business for VAT. This is a tax that applies to most products and services sold in the UK. VAT is charged to customers as a separate amount on an invoice, and is then paid to HMRC on a quarterly basis. The standard rate of VAT in the UK is currently 20% and this is the rate charged on most purchases. Once you have registered for VAT, you can claim back any VAT the business pays on products on services. With effect from 1 April 2019, if your taxable turnover is more than the VAT registration threshold, you will need to submit your VAT return digitally using accounting software.
Read More: How Do You Claim UK Tax Back?