There is no doubt about it, taxes give us all a hard time. It is a process that we are more than happy to let others handle for us. Understanding the various types of taxes is hard enough and performing the complicated calculations only makes it worse.
Small companies should have knowledge of the following taxes as it can help them avoid unnecessary penalties arising due to unawareness regarding taxes.
A sole trader who is under the age of 75 needs to pay income tax if the profit generated from the business exceeds £11,500, which is basically the personal allowance. This threshold is valid in cases where the sole trader does not have any secondary income such as a salary from a job.
The other situation is wherein a person is a sole trader but also earns an income in the form of a salary from a job, which could be for the position he holds in his own company. In such situations, tax will be automatically deducted as a part of the PAYE system by your employer. PAYE is not a type of tax, but a system employed by HMRC to make the process of collecting taxes easier.
There are two types of National Insurance that a small business is liable to pay. There is a flat weekly rate of £2.85 for businesses which have profits above the small profits threshold of £6025. This threshold is also known as class 2 NI. If your profits are lower than the threshold you can still pay class 2 NI in order to protect your claim to state pension and similar benefits.
The other type of NI is payable when the profits from your business exceeds £8164. This type of NI is referred to as Class 4 NI and contrary to class 2 NI it is not a fixed rate but a percentage of your profits.
Sole traders are not liable to pay corporation tax to HMRC; only limited companies are required to pay corporation tax. Unlike income tax where a person is only supposed to pay taxes above a certain threshold, corporation tax is to be paid by a company as soon as it starts making profits. The only condition wherein a company will be exempt from paying corporation tax is when it is not making any profit. The present rate at which corporation tax is charged for businesses is 19%.
VAT or Value Added Tax is a tax that is payable by a company that has a VAT taxable turnover greater than £85000. It does not matter whether the company is a partnership, LLP, sole trader or a limited company. There are three VAT rates which are standard rate which is 20%, the reduced rate which is 5% and the 0% rate. These rates depend on the type of goods that you sell and whether they are eligible for VAT or not. At the moment, digitalisation of taxes has been implemented only for businesses that have a VAT turnover of above £85000.
A business that operates from an office or retail premises is liable to pay business rates which is quite similar to council tax. Certain types of premises are exempted from business rates and these include farm buildings while there are also properties that are eligible for subsidy on business rates. You are not supposed to pay business rates if you are running your business from your residential property. However, if you have employees coming over to your house for work then you may have to pay business rates and council tax.
A limited company can distribute its profit among its shareholders. This profit that can be distributed is usually the profit that remains after the company has cleared all outstanding taxes, liabilities and expenses. This profit which is distributed among the shareholders is known as dividend. National Insurance Contribution is not payable on dividends and if they are not given away to shareholders they are retained in the bank account of the company.
Small businesses face many difficulties in the initial stages with regards to implementing business plans, hiring the right staff and understanding the intricacies of taxation. The biggest concern of most small businesses is the calculation of these taxes that they owe to the HMRC. Hiring an accountant in such situations is more of a necessity than a luxury. You can contact us here to get the best accountancy services.
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