When to register a new business for tax
You should register as a sole trader or a partnership as soon as you start trading. There are two easy ways to do this:
- Calling the HM Revenue & Custom’s Newly Self-employed helpline on 0300 200 3504
- Registering online at https://www.gov.uk/log-in-file-self-assessment-tax-return
If you’re registering as a private limited company, then you’ll need to register with Companies House. You’ll also have to register for Corporation Tax within 3 months of starting to trade within your new business.
In all instances, you need to tell HM Revenue & Customers about your new business by the 5th October following the end of your first tax year. Failure to do so may result in penalties.
When do you start paying tax?
The tax year runs from 6th April until the 5th April the following year. Within a tax year, there are key dates you need to be aware of:
- Date for paper tax returns for 2016/17 tax year: 31st October 2017 (passed)
- Date for online tax returns for 2016/17 tax year: 31st January 2018
- Pay the money you owe by: 31st January 2018
- Registering for Self-Assessment in 2017/18 tax year: 5th October 2018
Your tax returns, and any money you owe, must be handed over to HM Revenue & Customs by these dates or you’ll face a penalty.
If you are a limited company, then you’ll also have to pay Corporation Tax. This is due 9 months and 1 day after your accounting period ends. Your accounting period is normally the one covered by your accounts.
If you’re a sole trader, then you’ll calculate your tax bill by completing a Self-Assessment tax return. You’ll also be entitled to the same personal allowance as employees, meaning you won’t pay tax on the first £11,000 you earn.
What tax will I pay as a sole trader?
As a sole trader, you’ll have to pay tax on your business profits, excluding expenses. Your duties will include:
- Sending a Self-Assessment tax return every year
- Paying Income Tax on all taxable business profits
- Contributing to your own National Insurance
- Registering for VAT if you expect your taking to exceed £83,000 in any 12-month period
- Paying tax on any monetary gain from selling business assets (or the business itself)
As a sole trader, you should also be aware that:
- You can withdraw cash from business without tax effect
- You get tax relief for expenses that are incurred exclusively for the business
- You can claim tax relief on interest and charges if your business bank account is separate to your personal one
What tax will I pay as a partnership?
Whether you are an ordinary business partnership, or have set up a limited / limited liability partnership, each partner will have to:
- Pay income tax on their share of the business profit
- Pay their National Insurance contributions
- Send a personal Self-Assessment form
- Register for VAT if they expect to pass the threshold in a 12-month period
In addition to this, one partner will be nominated to send a partnership Self-Assessment tax return at the end of each year.
As both a sole trader and a partnership, you can claim capital allowances on assets purchased for your business. This’ll reduce the amount you pay in tax.
What tax will I pay as a private limited company?
As the director of a limited company, you’ll have the following annual tax responsibilities:
- Send a completed Self-Assessment form to HM Revenue & Customs
- If you receive a salary, you’ll have to pay tax and National Insurance through the PAYE scheme
- You’ll be taxed on earnings via PAYE, and you’ll also have to complete tax returns
Your limited company, as its own entity, will have to:
- Pay Corporation tax on all taxable profits
- Send an annual return to Companies House
- Assemble your statutory accounts
- Send a company tax return to HM Revenue & Customs
- Register for VAT if you expect to pass the threshold
If you run a limited company, then you can choose to combine your Companies House accounts and annual tax returns then send them all together via the government’s website.
Any shareholders of your limited company will have to pay income tax on dividends and select other types of distribution made by the company, so it’s important you keep a record of these payments.
You should also note that income withdrawn from your limited company will be taxed as a dividend if it’s a distribution. Similarly, private expenses could be treated and taxed as earnings if there are for directors, or classed as distributions if they’re for shareholders.
Shareholders will be subjected to a double tax charge if your limited company sells any assets or the business itself. In this instance, the company will also have to pay corporation tax on any profits from the sales.
If any expenses are incurred solely for the business, however, then you may be entitled to tax relief.
Tax you need to know about
Income Tax: if you’re a sole trader then you’ll pay income tax on your business’s profits. If your business is your only source of income then you’ll only pay tax after you reach the personal allowance. If you have another job, you may reach the limit and start paying income tax sooner. As a limited company, you may also pay income tax on any salary or dividends you take.
Corporation Tax: this is a tax on limited companies’ taxable income and profits. Corporation Tax is currently set at 20%, and companies have to calculate their own liabilities. As there are no bills from HMRC, it’s essential you stay on top of your books. As soon as your company make any profit (unless it’s previously made a loss), then it will start paying Corporation Tax.
PAYE: if you hire employees, you’ll have to deduct Income Tax and National Insurance from their wages before they’re paid. You’ll have to use their tax code to calculate how much to deduct. Be aware that they may be on an emergency tax code.
VAT: you’ll have to pay VAT if you pass the threshold of £83,000 over a 12 month period. You can learn more about this in our free guide to VAT.
Business Rates: this is the business equivalent of council tax. If you operate from an office or retail premises then you’ll have to pay it. Some building are entitled to business rates relief, while others (like farm buildings) are exempt from paying altogether.
If you work from home, you won’t have to pay business rates and council tax, unless you have staff that also work from your home, or you sell goods & services directly from your home. You may have to pay both if you’ve adapted your home to work there (e.g. converted your garage into a salon) or if your property is a mix of business and domestic use (e.g. living above a pub).
Stamp Duty: your business may have to pay Stamp Duty on the transfer of land (or interests in land) or grants and assignments of leases. The Stamp Duty Land Tax can apply if you rent or buy premises. You may also have to pay a Stamp Duty Reverse Tax if you buy shares or other securities.
Capital Gains Tax: there’s a flat 18% Capital Gains Tax rate on business disposals. There is also, however, an “entrepreneur’s relief” scheme that allows you to pay a reduced rate of 10%, up to a lifetime allowance of £10 million.
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