Tax Essentials For New Entrepreneurs In The UK
Entrepreneurship is a whirlwind of challenges, learning and realisations, but as your experience grows, so do your knowledge and expertise. One area that many entrepreneurs struggle to come to terms with is tax. Navigating this complex world is daunting, so many choose to enlist the support of specialist accounting firms. Whatever your way of going about things, here’s a concise guide to tax essentials in the UK.
Business structure
It’s crucial you understand how the business structure you choose for your startup determines your tax responsibilities. The common structures are sole traders, partnerships and limited companies.
Sole traders and partnerships are relatively straightforward to set up, but they don’t offer the personal liability protection that limited companies do. Registering your business with HMRC is a critical initial step to ensure you’re correctly set up for tax purposes.
Understanding and paying income tax
As a sole trader or partner, your business profits are taxed as personal income. You must fill out a Self-Assessment tax return annually. The tax rate you pay depends on your income bracket, which is subject to change, so always check the current rates.
Limited companies pay corporation tax on their profits, and this requires registering for this process upon starting your business. This rate is usually different from the income tax rate but still depends on how much profit your company makes.
National insurance contributions (NICs)
Entrepreneurs must also contribute to National Insurance (NI), which helps to fund state benefits. The type and amount of NI you pay depend on your business structure and earnings.
Sole traders pay Class 2 and Class 4 NI contributions, while limited companies pay Class 1 NI contributions on salaries paid to employees.
Value added tax (VAT)
If your business’s taxable turnover exceeds the VAT threshold, which currently stands at £85,000, you must register for VAT. It’s an additional consumption tax on the value of goods and services.
Once registered, you’ll charge VAT on your products or services and claim it back on your business purchases. Understanding how VAT works and maintaining accurate records are vital for compliance and the reclaiming process.
Professional advice
Tax laws are subject to change, and each business’s circumstances are unique. Seeking advice from a tax professional or accountant can provide personalised guidance, help minimise your tax liability and ensure compliance. They can also assist with tax planning strategies to benefit your business in the long term.