Thinking of starting a business, but not sure what you need to know? Begin your journey here with my basic guide to business start-ups. In my role as Editor for The Business Show and Business Startup, I have talked with literally thousands of business owners and entrepreneurs about what they really need to know, not what a business guru thinks they need to know. This series is the result. Today’s blog looks at the thorny issue of tax.
How Business Tax Works
Any business has to pay tax, but different kinds of business have different kinds of tax. The following information is correct to the best of my knowledge at the time of writing (Nov 2014), but tax is constantly changing, so please check the current information at www.hmrc.gov.uk
Sole Trader and Partnership
The income tax rates for any income that isn’t from savings are 20 per cent up to £37,400, 40 per cent between £37,401 and £150,000 and 50 per cent over £150,000. Individuals with income under £100,000 are entitled to a personal allowance or a tax-free amount, which is presently £8,105. You only pay tax on income above this threshold.
If you’re self-employed, you’ll also have to pay Class 2 (£2.50 per week) and Class 4 National Insurance. Class 4 contributions are a percentage of the annual business profit, only applicable after profits reach £7,225.
Both of these payments are done through self-assessment, where you must file a tax return at the end of every tax year. You’ll need to set up the National Insurance contribution records by registering with HMRC as soon as you start the business.
Corporation Tax is a tax on the profits of limited companies. The main rate of Corporation Tax is 25 per cent, but companies with profits less than £300,000 can pay Corporation Tax at 20 per cent. New companies need to register their details with the appropriate Corporation Tax Office within three months of incorporation.
Most business to business or business to customer transactions attract Value Added Tax (VAT) at 20 per cent, although some items are taxed at 5 per cent or even a zero rate, while others are entirely exempt. New businesses only become liable for VAT after the taxable turnover for the previous 12 months exceeds £73,000.
Import VAT and Duty
Businesses importing and exporting products outside the European Union are liable for import VAT and duty. The rate depends on the product and country.
Exemptions and relief
New businesses can benefit from tax allowances and relief, such as small business rate relief.
- Capital allowances relief provides Corporation Tax relief for Limited companies buying assets such as computers, vehicles and furniture during the first year of business.
- Research and Development Relief allows businesses to deduct their actual expenditure on most research and development cost from their Corporation Tax liability. SMEs can choose a tax credit instead of tax relief.
- Working Tax Credit is aimed at people over 25-years old who work more than 30 hours a week on a low income. It varies with income and could be very useful for start-up entrepreneurs who are just getting going.
- Enterprise zones offer a 100 per cent tax exemption for five years for start-ups within their geographical area, or businesses relocating there.
- The Enterprise Investment Scheme offers Income Tax relief of 30-50 per cent for anyone investing up to £200,000 in new ventures. Any gains are also exempt from Capital Gains Tax if they are reinvested in new ventures in the same tax year.
Tax is a confusing area and subject to change, so please check your position before making any decisions or taking any action. The information in this blog is correct to the best of my knowledge at time of publication, but I cannot accept any responsibility. It’s your job to check the latest info. If you’re at all uncertain, please seek professional advice.
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