Beginner’s guide to business tax
With a new business comes new tax responsibilities, and if this is your first time then it can all look a bit confusing.
So to help you out, we’ve written this quick guide to the main types of business tax you’ll have to pay, how you’ll pay them and what you can do to stay on top of it all.
So, let’s get to it!
Tax businesses have to pay
You’ll pay income tax on your business’s profits. How you pay it depends on your business structure.
If you’re a sole trader and you don’t have another source of income, you won’t have to pay income tax until your business’s profit goes over your personal allowance (currently at £11,850).
If you’re operating as a limited company then you’ll pay income tax on any salary or dividends you take from the company.
If you do have another source of income, then you may start paying income tax sooner. It’ll be paid from your salary (either from your employer or from your limited company) under the Pay As You Earn (PAYE) scheme.
If you’re a limited company, then you’ll have to pay corporation tax on your business profits. Corporation tax is at 19% for all companies.
Unlike income tax, there’s no personal allowance for a company so you’ll start paying corporation tax as soon as you start making profit. It needs to be paid 9 months and 1 day after the end of your accounting year.
What’s the difference between corporation tax and income tax (UK)?
You’ll pay corporation tax on the profit made by your company. You’ll pay income tax on your personal income.
As a limited company, your personal and business finances will be separate. Sole traders don’t pay corporation tax.
Recommended read: is moving over to a limited company a good idea?
Once your annual turnover exceeds £85,000 you’ll need to register for VAT. This is the case regardless of whether you’re a sole trader, limited company, partnership or LLP.
You’ll have to pay business rates on any office or retail premises you operate from. It’s like council tax for your business property.
There are a few exceptions to take into consideration. Farm buildings, for example, are automatically exempt from business rates. Other types of property are entitled to business rates relief.
If you work from home, you won’t have to pay business rates and council tax, unless:
- You employ staff who also work from your home
- You sell goods or services to customers who visit your home
- You’ve adapted your home to work there
- Your home is part business and part domestic (e.g. you live above a pub)
If you work from home, you’ll probably be eligible for tax relief. We wrote all about that in the KashFlow guide to working from home.
Top tax management tips
Being a small business owner is overwhelming. You’re handling your marketing, promotions, networking, business deals, sourcing raw materials, conducting price and competitor research, balancing the books, checking inventory and who knows what else – sometimes for the first time in your life.
So much effort goes into the day-to-day of a business that sometimes important but “out of sight” jobs like tax end up being forgotten about until the last (stressful) minute. Sometimes, you just face a mental block in trying to get your head around the different types of tax.
Plan in advance
One way of making sure you have enough money to pay your tax bill is to plan ahead and budget for your tax bill. This is a great way to manage your cash flow over the year.
Creating a plan that includes your projected tax liability is relatively simple once you understand your business’s tax obligations. Using online accounting software like KashFlow allows you to track your finances more closely and ensure you’re budgeting through the year. It also makes it easier to submit your tax returns at the end of the year, because your numbers are already in place. Learn more.
Even in new business, lots of things can happen in a month so it makes sense to keep track of your finances as you go.
This also means that, when it gets to the end of your financial year, you’ve already done the bulk of the work and you don’t have spend ages digging through piles of old papers and receipts. You simply have to double check your numbers and send your forms off.
Also, sending regular updates will be essential to ensure that you’re compliant under Making Tax Digital from 2020. Learn more about MTD in our Making Tax Digital Hub.
Consult an accountant if you need help
It’s much better to ask someone to double check or give you advice before you go too far down a wrong path. No matter how careful you are, there can be technical issues that may end up catching you out.
It’s therefore best to ask an expert to double check, or help file your business tax returns if you’re unsure. They may also help resolve any audits you may have and assist in other areas.
Keep your records
As a general rule, you should keep tax records for at least 3 years after the relevant financial year ends. Unfortunately many business don’t realise this, and find themselves scrabbling round trying to find or replicate documents on demand.
It’s also worth making a note that any tax records involved in property or real estate will need to be kept for at least 3 years after it has been sold or disposed of.
While not comprehensive, this article should hopefully leaving a bit more confident about the types of business tax you’ll face when running your own business, and how you can be best prepared when they appear on your horizon.
So what’s next?
Well, if you head over to the KashFlow blog you’ll find plenty of articles on the different areas of tax and business finances (as well as HR and Payroll).
If you’re using KashFlow (or thinking about it) you can take a look at our Knowledge Base too – which is basically a guide to running your business with our cloud bookkeeping software on hand to help.
Any questions? Anything you’d add? Let us know in the comments below or on social media!