Blog: Five small business taxes you need to know about
Whether your business is just starting out or has been established for several months, there’s one crucial thing that needs to be on your radar: taxes.
Paying tax is compulsory, regardless of the sector in which you work, the services you provide, or the size and scale of your business. That is unless they are exempt from doing so, such as a charity, and even then taxes may arise.
There are multiple company taxes to be paid, which can easily make the subject feel like a minefield, especially if you’re brand new to it.
To help you get started, here are five rates small business owners like you need to be thinking about to stay compliant and out of trouble.
1: Corporation Tax
Corporation Tax applies to limited companies, which means you don’t have to pay it if you are a sole trader. It’s applied to a company’s profits after salaries and other business expenses have been paid, but before any dividends are taken by the company shareholders.
The amount you owe is calculated by preparing a corporation tax computation, the details of which are included on a form CT600 and filed online with HMRC. The computation sets out your company income, minus any business expenses and tax allowances.
2: Income Tax
Income Tax is paid at an individual level rather than ‘business’. Everyone pays it if their total income exceeds the personal allowance of £12,570 (for 2022/2023); employees will usually have it deducted from their wages through PAYE but partners in businesses, the self-employed (sole traders) have to pay it through Self Assessment.
The amount of Income Tax to be paid differs from person to person; for those earning between £12,571 – £50,270, the basic rate is 20%, rising through bandings to 45% for those earning over £150,000.
Be mindful that other earnings, such as dividends and savings interest, will be classed as income and can therefore potentially put you in a higher tax bracket.
3: National Insurance
While National Insurance may not actually be a tax, it’s still important to think of it as one because it’s money you have to pay to the Government in the same way you pay taxes.
If you’re a company director earning more than the National Insurance Primary Threshold (currently £9,568 a year) or a self-employed business owner earning more than the Small Profits Threshold (currently £6,515 a year), you must pay National Insurance.
If you have employees, the business may also need to pay employers’ National Insurance on their earnings.
4: Value Added Tax (VAT)
VAT is a tax we should be familiar with because we pay it on most goods and services we buy at the point of sale. It increases the price of anything VAT-able by a percentage – generally 20%, although there are different rates depending on what is being sold. As a business most goods and services bought from suppliers will have VAT added to the price, and you may also have to charge VAT to your own customers.
You can only add VAT to your invoices if your company is VAT-registered, which is a compulsory requirement if your annual taxable turnover is more than £85,000 or it is expected to meet this threshold within the next 30 days. When considering if you meet the VAT threshold you look at the turnover for the last twelve months.
Even if you do not meet the threshold for having to register you can apply for VAT-registered status on a voluntary basis. What’s the incentive for doing this? It means you can claim VAT back on business purchases, e.g. office equipment and stationery. It can also give your customers the perception that your business is larger and more established than it is.
Subcontractors/businesses under CIS (Construction Industry Scheme) account for VAT under the VAT Reverse Charge rules. A subcontractor/business in the CIS scheme will not charge VAT on its invoices to a contractor/business in the CIS scheme where that contractor sells on to a consumer; instead the contractor will account for the VAT.
5: Tax on dividends
Company shareholders may receive dividends – a distribution of cash from a company’s profits (or reserves).
You don’t pay tax on dividend income that falls within the £2,000 a year annual dividend allowance. Also, if, when added to your other income, the total falls with the aforementioned personal allowance of £12,570 (for 2022/2023) then no tax is payable. Anything over these amounts is subject to Income Tax.
Dividends are always added onto your other income and therefore treated as falling into your highest tax band.
Dividend Tax Rate
Dividend Tax Rate
|Basic rate taxpayers pay the dividend ordinary rate||8.75%||7.5%|
|Higher-rate taxpayers pay the dividend upper rate||33.75%||32.5%|
|Additional-rate taxpayers pay the dividend additional rate||39.35%||38.10%|
Tackle your taxes
Each type of business will have different and specific liabilities and access to a variety of tax reliefs and allowances so it’s important you do your own research, but hopefully this quick blog has helped you to understand some of the key taxes you should learn more about.
As your business grows it’ll become more important than ever to keep your tax and accounts in check, so if you’re looking for additional advice or support get in touch with our qualified tax advisors and accountants today and we’ll make sure you’re in the best possible shape for continued success.
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