Paying tax when you’re a small business

Are you looking to set up your business but confused about tax? 

This simple guide will take you through the types of tax you may come across and if you’ll need to pay them. 

Once you’ve registered a business, you must what taxes you have to pay and how much you need to pay. The legal structure of your business can determine which taxes you’ll need to pay and which things you need to be mindful of. 

Not paying your taxes on time, or not paying the correct taxes, can lead to HMRC taking action.  For example, you may have to pay a fine, and in extreme circumstances they may close down your business.

Follow the simple steps in this guide to make sure you’re paying the business right tax from day one.

Paying tax as a sole trader

If you’re a sole trader you have to pay tax on the profits your business makes. This will be calculated annually when you complete your Self Assessment tax return

The amount of tax you pay is determined by your business’s net profit, or profit after any expenses have been paid:

  • If net profit is between £12,501 and £50,000, then you will have to pay 20% tax.
  • If net profit is between £50,001 and £150,000, you’ll need to pay 40% tax.
  • If your net profit is over £150,000, then you’ll have to pay 45% tax. 

As a sole trader, you’re classed as self-employed, which means you don’t have to pay tax on the first £12,500 you make. 

Sole traders are also expected to pay National Insurance (NI) if you make a profit of £6,365 or more over a year. This will qualify you for a state pension and Maternity Allowance. The amount of National Insurance you pay will vary depending on how much profit you make annually. 

You may also need to register for VAT (which you can do through the government website) and complete VAT returns if your business’s sales turnover is over £85,000 annually. 

Once you’re registered for VAT, you must add VAT to the goods and services you provide. You can also reclaim VAT you have been charged. Remember to include your VAT number which you’ll receive upon VAT registration. Do not add VAT to invoices if you are not VAT registered.

Paying tax as a limited company

If you’ve registered your business as a private limited company, you have to pay corporation tax on your business’s taxable profits. 

Corporation tax is tax paid by businesses on their profits. Limited companies, community interest companies and Public limited companies must all pay corporation tax. 

Taxable profits for corporation tax include money made from doing business or trading, investments, and selling assets (for more than they cost), and the current corporation tax rate is 19%. 

To pay corporation tax, GOV.UK advises you to:

  • Register for corporation tax when you set up your business.
  • Keep accounting records and complete company tax returns to make calculating your corporation tax easier.
  • Pay your corporation tax (or report if no payment is due to HMRC) by your deadline, which is typically 9 months and 1 day after the end of your accounting period. 
  • File your company tax return by your deadline, which is usually 12 months after the end of your accounting period. 

You aren’t notified of how much corporation tax you need to pay, so it is up to you to calculate, report and pay your corporation tax. As a limited company you will need an accountant to file your accountants.

As the owner of a limited company, there are a number of ways to be paid. Usually you will set up Pay As You Earn (PAYE) and take a salary. You don’t have to pay income tax on the first £12,500 you earn each year. There are other ways of payment, it’s best to check with an accountant for further advice.

Similarly to sole traders, you must register for VAT and complete VAT returns if your business’s turnover is above £85,000. 

Businesses that are registered for VAT must add VAT to the goods and services they provide customers or clients. 

Registering for VAT, which you can do online through the government website, means you can reclaim VAT you have been charged, and it allows you to charge others VAT for your goods and services.

If your turnover is below £85,000, you may still consider registering for VAT, as you can reclaim VAT you may have been charged and charge clients or customers VAT. 

When you employ people, you will have to register for PAYE if any of your employees earn £118 or more in a week, have another job, have a pension, or claim expenses or benefits. 

PAYE is the system used by HMRC to collect income tax and National Insurance. When paying your employees through your payroll system, you need to ensure you make deductions for PAYE. You can register as an employer for PAYE online if your company has one to nine directors.  

It is likely you will have to pay business rates on any commercial properties your business uses. 

Business rates bills are sent annually by local councils in February or March in preparation for the following tax year. The business rate you pay is based on the property’s rateable value (the open market rental value).  

Before setting up your business, it’s crucial that you familiarise yourself with the kinds of tax you may come across and then determining which you will need to pay. 

We hope this article has helped clear things up for you, and we recommend you speak to an accountant if you’re still not 100% sure on what tax your business should be paying. 

While we can’t help you with that, we can help you grow your business if it’s based in County Durham and has been operating for less than a year. Apply now for the chance to be part of the next Durham City Incubator cohort.

The next application deadline is Friday 12th June 2020

apply now