Guide to UK Business Tax
Once you've started a new business it's time to master taxes
Starting a UK-based business, big or small, means you will be subject to corporation and other business-related taxes that are separate from your personal income taxes. It's important to understand what you have to pay and when before you register your business.
Types of UK Business Taxes
Corporation tax in the UK is the tax imposed on a limited company's income or profits. Businesses are required to calculate their due tax annually, 9 months and one day after the annual accounting period ends. The corporation tax form (CT600) is filed with the HMRC.
The current Corporation Tax rate in the UK is 20%. Sole traders or partnerships are exempt from this tax, as they are self-employed and pay tax on their personal business income.
These types of unincorporated businesses also pay Corporation Taxes:
Value Added Tax (VAT)
The VAT tax in the UK is also vital to businesses. This taxes the final sale of goods and services in the UK.
Your business should register for VAT if the value of goods and services in an accounting year exceeds the registration threshold of £85,000. Companies should also register for VAT if the anticipated value of their goods and services will exceed the annual threshold in 30 days alone. Once you register, you need to update your invoices to state the additional VAT taxed charged to your customers, as well as your VAT number.
The standard rate of VAT is 20%, but this can vary depending on the size and scope of your business goods and services. The reduced VAT rate can be applied to certain sales, like childcare necessities or mobility assistance. The zero VAT rate is for goods and services that must be recorded in your VAT accounts, but are charged at 0% to your customers. Some zero rate items include books, newspapers, exported goods, children's clothes and more.
There can be benefits to registering for VAT even if you do not meet the threshold. If you pay more VAT on business purchases, as some startups and small businesses do in their first years, the HMRC will refund the difference if this total payment exceeds the amount of VAT received. Your business accountant or HMRC representative can outline any potential benefits for registering.
Smaller businesses can adopt a flat rate VAT payment plan, which allows you to pay a fixed amount of gross profits to HMRC annually. VAT returns can likewise be filed online with the HMRC.
National insurance is deducted from earnings to fund benefits like NHS. Sole traders and self-employed partnerships pay National Insurance Contributions as part of their income tax from their business profits.
Limited companies will pay Class 1 NICs as a corporation, with their employees paying NICs on their earned income. These companies can reclaim up to £3,000 with the Employment Allowance break.
Stamp Duty Tax
Stamp duty can apply to businesses who purchase or sell land, real estate or securities like business shares. The land tax is applied to companies who rent or buy storefront or warehouse properties directly related to goods and services for their business. The reserve tax is applied to companies who purchase shares.
Pay As You Earn (PAYE)
PAYE tax is applied to limited companies and corporations who employ staff. As a sole trader, PAYE is not applicable.
PAYE is applied to all payments to an employee: salary, overtime, bonuses, sick leave and maternity/paternity leave. PAYE taxes are also collected on lump sum payments, with the first £30,000 being tax free.
Employers can use the HMRC pay tables to determine deductions per month, which vary depending on salary.
As a new business, understanding your tax requirements will help you establish profits in the short and long term and determine your financial projections. As always, it's important to keep organized and detailed records each tax year.