If you’ve been watching the news this week, you’ll be aware that Prime Minister David Cameron is having a rather difficult time of things! Following intense public pressure, he took the unprecedented decision to release his personal tax records this weekend. According to the Guardian, his office published “a summary and explanation of the prime minister’s tax affairs going back six years.”
While we don’t need to get embroiled in the ‘Did he, didn’t he?’ argument, one thing is clear. Whether you’re a solo business owner working from your bedroom, or the Prime Minister, you’re expected to comply with UK tax law.
If you’re just starting out in business, getting your head around the tax laws can be confusing. Today’s blog will outline the four main taxes so you know the next step to take. There are three key areas to keep in mind: get organised right from the start, keep on top of your paperwork and pay your taxes on time. If you get those three key areas of your business flowing well, you’ll be building on a strong foundation.
Income tax forms the largest source of revenue collected by the Government. Everyone has an income tax personal allowance – which is the amount of income you can earn before paying tax. This is true whether you’re employed or working for yourself. The current personal allowance rate is £11,000.
Once you earn more than that, you pay a different tax rate as follows:
National insurance contributions
National Insurance Contributions (NI) form the second largest source of revenue collected by the Government. Whether you are an employee earning over £155 per week or are self-employed and make a profit of £5965 or more a year, you pay NI contributions to qualify for certain benefits including a state pension. Most people pay National Insurance contributions through self-assessment.
VAT forms the third largest source of revenue collected by the Government. You must register for VAT with HM Revenue and Customs (HMRC) if your business’ VAT taxable turnover is more than £83,000. You can register voluntarily if your turnover is below this amount.
If you are VAT registered, there are three different rates of VAT you need to be aware of. Standard rate (currently 20% and used on most products and services), reduced rate (currently 5% on items such as domestic fuel or child car seats) and zero rate such as children clothes and motorcycle helmets.
VAT is possibly the most complex tax levied on your business, so it’s worth getting advice from an accountant to save yourself under or over paying.
Corporation tax forms the fourth largest source of revenue collected by the Government. It is the tax payable on the profits your limited company makes. Unfortunately, you don’t get a bill for corporation tax, so you need to stay ahead of the game. This is where keeping up to date with your paperwork and being organised comes in – not only will you be more likely to pay your tax on time, but you’ll know beforehand how much it’s likely to be, so you can set money aside.
You must register for corporation tax when you start trading, keep accounting records and prepare a company tax return – all of which an accountant can help you with.