Types of Taxes a Business has to Pay
It is important to understand which taxes apply to your business along with remembering the deadlines as these can vary from business to business. Missing a deadline in submitting correct tax return can cost your business a financial penalty from HM Revenue & Customs (HMRC), hence it is always useful to take help from a small business accountant.
There are 4 types of taxes all of which or some of which will apply to a business depending on sector, size and performance of the business
1. Income Tax (IT)
2. Corporation Tax (CT)
3. Value Added Tax (VAT)
4. National Insurance Contributions (NIC)
Income Tax
- Income tax applies to your business if you are operating as a sole trader i.e. self employed
- You have to file your income tax return self assessment by 31st of January every year
- Income tax also applies to limited companies as it gets deducted from employees’ salaries via ‘Pay as you earn (PAYE) and gets paid directly to HMRC. It is responsibility of company director to ensure deduction and paying of tax on any Salary/wages that are paid by the business
- Income tax is paid on income exceeding £12,500 for each employee and profits exceeding £12,500 for self-employed
- If your income is less than £1000 per annum then you don’t have to register with HMRC as a sole trader as this is covered by trading allowance but if it exceeds £1000 then you have to register but don’t have to pay tax until your income exceeds £12,500 per annum
- For sole traders; taxable income is calculated after deducting all allowable expenses and then relevant tax rate will be applied on your income,
Taxable Income Tax Rate Income Tax Band
Up to £12,500 0% Personal allowance
£12,500 – £50,000 20% Basic Rate
£50,001 – £150,000 40% Higher Rate
£150,001+ 45% Additional Rate
Corporation Tax
- Corporation tax applies to limited companies, in other words it is income tax for a company
- Sole traders and partnerships don’t need to pay corporation tax
- It is worked out as a percentage of a business’ profits after allowances, tax relief and all allowable expenses i.e. have been accounted for
- Corporation tax rate is standardised for every company 19% which is expected to drop to 17% in 2020
- Corporation tax, like income tax, is submitted through self-assessment
- Corporation tax needs to be filed within 12 months after the end of a company’s financial year
- Corporation tax bill needs to be settled before the end of nine months and 1 day from the end of a company’s Accounting year
- Corporation tax return has go be paid before filing a company’s tax return at Companies House
- New businesses who are in first year of trading as an incorporated business, usually have two accounting periods to take into account
- In addition, businesses making over £1.5 million in profit have to pay their corporation tax in installments
Value Added Tax
- A business has to be registered for VAT when its turnover exceeds £85,000
- Some items such as children’s clothing, books, and items sold in charity shops are exempt from VAT and are classed as zero rated
- Some other products and services incur a reduced rate VAT, such as home energy or children’s car seats etc
- Full list of reduced rate and zero rate goods and services can be found at https://www.gov.uk/guidance/vat-exemption-and-partial-exemption
VAT Rate % VAT
Standard 20%
Reduced rate 5%
Zero rate 0%
National Insurance
- National Insurance contributions (NICs) are paid by a business for its employees
- NICs are also paid by self employed people to qualify for certain benefits such as your state pension or maternity allowance
- NICs are paid for employees directly to HMRC at the same when PAYE is paid
- There are four classes of NICs that apply to self employed individuals. Current rates for Class 1, 2 and 4 can be fund on https://www.gov.uk/national-insurance/how-much-you-pay
National Insurance Class Who Needs to Pay
Class 1 Employees earning more than £166 a week and under State Pension age. These are deducted automatically and paid by employer at the same time as PAYE. This is usually on the 22nd of the month
Class 1A or 1B Employers pay these directly on their employee’s expenses or benefits
Class 2 Self-employed people who earn more than £6,365 a year pay these via self- assessment.
Class 3 Voluntary contributions – These are paid to fill or avoid gaps in ones National Insurance record
Class 4 Self-employed people with profits exceeding £8,632 a year pay these via self-assessment
