As a new business, one of the first financial steps you need to take is to make sure you are set up correctly to pay tax. Whether you are a sole-trader, a limited company or a partnership, you’ll need to register with HMRC within 3 months of starting to trade.
Step 1 is to get a Unique Taxpayer Reference number. You’ll need one for yourself (https://www.gov.uk/register-for-self-assessment/self-employed) and if you have a separate company, you’ll also need one for the company itself (https://www.gov.uk/limited-company-formation/set-up-your-company-for-corporation-tax). This reference allows you to check your tax accounts online and also to pay tax when it is due.
The Different Types of Tax
The tax system is complex and different businesses need to consider different taxes. Here are the top taxes to consider – and how and when you need to file tax returns.
Income Tax
Everyone who earns is liable to pay income tax – although there are tax allowances which means you may not have to pay tax on all your income. Whether you are a sole-trader or operating through your company, you will almost certainly need to complete a Self-Assessment Tax Return each year. This must be submitted and the tax bill paid by 31st January of the year following the close of the tax year (for example, 31st Jan 2023 for the tax year ending April 2022) but you can (and should) submit it sooner if you can.
National Insurance Contributions (NIC)
Again, everyone who earns is liable to pay NICs but there are also tax allowances for these. You National Insurance payments are calculated as part of your Self-Assessment Tax Return so everything is handled at the same time.
Corporation Tax
Limited Companies and certain types of partnerships have to pay corporation tax on their profits. This is currently 19% (at the time of publication) but it is subject to change. If you are a limited company it is important to keep good accounts so you are able to easily see your profits and calculate the tax due. You must submit your company return to Companies House 9 months after the end of your financial year (so 31 December for a year ending 31 March) and pay your tax bill to HMRC.
Value Added Tax (VAT)
Simple in theory but complicated in practice, VAT had to be added to anything you sell, if you are VAT-registered. Not all companies have to be VAT registered (through you must if your turnover is above a certain level). In some cases it can be in your best interested to register voluntarily since you can offset the VAT you have to pay against the VAT you have paid by purchasing goods and service from others. VAT returns have to be submitted online and paid every three months so you need good accounting software to help you with this.
Employers Tax
As an employer, you are expected to collect tax and NICs from your employees and pay it to HMRC via the PAYE system. This is usually done via your payroll system. You also need to pay NICS as an employer for each member of staff. You have to register as an employer with HMRC in order to report your payroll information and pay HMRC.
Feeling a bit overwhelmed?
It’s not surprising if even that short list of tax considerations is leaving you scratching your head. The UK tax system is complicated even for a small business that isn’t yet turning a profit. There is plenty you can do to make it more straightforward:
- Invest in some good book-keeping software. There are some really good (and HMRC approved) software packages to help you with business accounting. Personally I like Xero and recommend it for all my clients.
- Get into the habit of doing the books at least weekly. That way you always know how you are doing and will keep on top of the bills and invoicing.
- Reach out to us at Start-Talk -Grow and arrange a conversation with me. We can go through your business plans and what that might mean for your tax situation.
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