Small Business Taxes You Need to Know About

Understanding what taxes you need to pay is important. If you are working for someone, this is all taken care of for you by your employer. If you are a sole trader, self-employed or own your own business, then it’s your responsibility to not only understand tax payments but to pay it as well.

At VW Taxation, we provide accounting services for a range of small business across the Hampshire area and we know sorting out tax obligations can get quite complicated for many. To help, here’s our quick guide of what you should be paying.

1. Income Tax

The most common form of taxation is income tax and anyone who works and earns over the threshold has to pay it. If you are a sole trader, you will be subject to the same rates as any normal employee.

  • Up to £12,500, you pay no tax.
  • Between £12,5001 and £50,000 the tax rate is 20%.
  • Between £50,001 and £150,000 the rate is 40%.
  • Above this, the rate is 45%.

If you have limited company status, you will be charged income tax on the pay that you take out of your business, just like a normal employee using the PAYE scheme. If you are self-employed but also employed by another person, in other words, you have two jobs, you may start paying tax on your self-employed earnings sooner.

2. National Insurance

In addition to income tax, you will need to pay National Insurance. While it’s not really considered a tax, most of us actually think of it as such. It’s collected at the same time as income tax. Normal employees pay Class 1 National Insurance contributions each month. If you are a sole trader or self-assess, things are slightly different. You are liable for Class 2 and 4 contributions as follows:

  • Class 2 NI contributions kick in above profits of £6,365 and mean you pay £3 a week.
  • Class 4 NI contributions start once your reach £8,362. Up to £50,000, you’ll pay 9%. Above that, it’s 2%.

If you are a limited company, things are slightly more complicated. National Insurance for employees is paid above £166 a week. Up to £962 a week the rate is 12%. Above this, it’s 2% a week.  Employers also have to pay Employer’s National Insurance which currently stands at 13.8%.

3. VAT

Goods and services that are subject to VAT apply a wide range of things. The threshold for paying VAT, however, is £85,000. If you are under this then you can opt to register for VAT with HMRC but it’s not obligatory.

If you have sales of products or services that are over £85,000, the VAT rate over this amount is 20%. Some goods and services such as home energy solutions are charged at a lower rate of 5% and things like food have no VAT attached.

The big change this year is that you need to present your VAT returns digitally, which means your business must use approved software. Check out our blog on this here.

4. Corporation Tax

If you run a limited company, you will be liable to pay corporation tax which currently stands at 19%. There is no higher level where the tax kicks in as with income tax. The moment you begin making a profit as a limited company you have to pay the corporation tax and it’s due nine months and one day after the end of the accounting year.

5. Business Rates

If your business operates from offices or you have something like a retail store, you may also have to pay business rates which can vary depending on where you are located. This is a form of council tax and is used to provide services in the area. While some buildings are exempt from business rates, most aren’t.

Many people now work from home rather than an office. Therefore, if you are self-employed and use your home as your workplace. Therefore you already pay council tax and don’t have to pay additional business rates. There are exceptions to this, for example, when you start employing people and they work in your home.

Understanding what your tax and National Insurance liabilities are is important whether you are a limited company or a sole trader. Employing the services of a professional accountant can ensure that your books are always kept up to date and can even save you money by reducing your tax liability.

If work in Portsmouth or Hampshire and you would like to find out more, contact the team at VW Taxation today.

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