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Small business taxes – what you need to know

Posted by Tom West on Feb 9th, 2019 | Tax

Small business taxes - what you need to know, image of people co-working on a laptop

Starting your own business is a truly exciting life decision, allowing you to pick your own gigs and do things your way. On the other hand, failure to get familiar with the small business taxes you’ll need to pay can have major consequences when the taxman cometh.

To help you get a better idea about what you’re expected to pay as a freelancer, contractor, or small business owner, here’s a quickfire explanation of the main small business taxes.

This article covers the following topics (click to go to straight to the section):

You’ll also find a Crunch webinar and Q&A for limited company directors called ‘What Taxes Do I Pay?’

Check out our separate article if you’re looking for the current tax rates, thresholds, and allowances.

What is Corporation Tax?

Corporation Tax is applied to limited company profits after salaries and other business expenses have been paid, but before dividends are withdrawn.

Sole traders don’t pay Corporation Tax.

How and when do you pay Corporation Tax?

UK-based limited companies are required to submit an online form to HMRC annually called a CT600. This contains details of your company’s income, minus any tax allowances and expenses.

Any Corporation Tax you owe must be paid by nine months and one day after your company’s accounting period ends (a date known as your company’s ‘year-end’). You have the option to pay at any time during this period, but we highly recommend getting this out of the way as soon as possible to avoid fines.

In order to pay your Corporation Tax, you’ll need to log into your HMRC online account and choose a payment method, you can choose from online or telephone payment, direct debit, via your bank, or use a company credit card.

You cannot use a personal credit card and you can no longer pay at a Post Office. You can find all the information about paying your Corporation Tax bill at the Gov.uk website.

Business Expenses Guide - Get it for free!

What is Income Tax?

Income Tax is paid on certain income you personally receive, such as salary and dividends and rental income. Income Tax is not payable on any income from the sale of assets, such as share disposals or if you sell a property which is not your main residence – this would be taxed under Capital Gains.

You can check out the income tax rates in our tax rates and thresholds article.

How and when do you pay Income Tax?

If you’re a limited company director and draw a salary above the annual personal allowance, Income Tax will be paid at source through your company’s PAYE scheme. Any dividends you take from the company are taxed through your annual Self Assessment, which has to be completed by all company directors.

For sole traders, Income Tax is paid on the profit you make from your business, which you include on your annual Self Assessment tax return.

The amount you owe should be paid to HMRC before 31st January every year with any Payment on Account due on 31st July each year.

Struggling with Self Asssessment? Our guide can help

What is National Insurance?

National Insurance contributions build up your state pension entitlement and help pay for public services. You’re only required to pay National Insurance if you are over 16 and are making a profit equal to or above the primary threshold.

How and when do I pay National Insurance?

As with Income Tax, if you’re a limited company director, any National Insurance contributions due will be taken via PAYE.

National Insurance for sole traders is calculated in the annual Self Assessment and paid to HMRC by 31st January every year. You can read our article self-employed National Insurance explained for further details.

What is VAT?

Value Added Tax (VAT) is added to the price of most goods and services. VAT-registered companies must charge VAT to customers, but also have the benefit of being able to reclaim any VAT that they have paid on business expenses.

Companies are not automatically registered for VAT and don’t need to register unless their annual turnover exceeds the VAT threshold. We’ve written a short article explaining VAT registration, the types of VAT schemes that may apply and when you might consider registering for VAT even if you are below the threshold.

How and when do I pay VAT?

VAT is paid quarterly from the date of your company’s registration. VAT returns must be submitted to HMRC and paid online within 37 days of the end of the relevant quarter.

From 1st April 2019, the government is bringing in Making Tax Digital (MTD) for business, this means all VAT registered businesses will need to use MTD compatible software, such as our Crunch accounting software.

If you’re registered for VAT, you must submit a return even if you have no VAT to pay or reclaim.

What is the VAT Flat Rate Scheme?

If your business has a turnover below £150,000, it might be beneficial to register for HMRC’s VAT Flat Rate scheme. This simplifies VAT reporting for small businesses, meaning there is no need to record VAT for individual purchases and sales.

Doing this can often also result in an increase in your company’s income, as you can still charge the basic rate of VAT but only pay HMRC a flat percentage rate (based on your trading activity).

What are business rates?

If you run your business from a non-domestic property (e.g. an office, shop or factory), you’ll likely have to pay business rates.

How and when do I pay business rates?

You’ll be sent a business rates bill from your local authority in either February or March each year for the financial year that starting on the following 1st April. Details of how to pay will be included on the bill, and you can opt to pay in 12 monthly instalments.

Our expert Luke Young gives a jargon-free explanation of what taxes you’re expected to pay as a limited company director.

Download the webinar slides

Q&A: Expenses

 

Q: Do you need to keep all receipts for food?

You should keep all receipts for any business expenses you claim. You don’t necessarily have to keep the original – you could just keep a photo. At Crunch, we offer an app that integrates with our online accounting software. All you have to do is take a picture and the expense is automatically logged and uploaded. Our “Can I claim lunch as a business expense” article explains what you need to know.

 

Q: I work from home can I claim meals?

Probably not. The rule is that you’re allowed to claim a meal as subsistence – but it has to be outside of your normal working routine. So, if you’re attending the same workplace (ie your home office) every day, it’s unlikely that you can claim any subsistence as an allowable expense. If you travelled away from the office to visit a client for a business meeting, you may be able to claim your lunch as an expense. Our “Can I claim lunch as a business expense” article explains what you need to know.

 

Q: Do day-to-day food receipts need to be kept? and can you submit revolut/monzo transactions as receipts?

As above, you should keep all receipts, but this could be as simple as a photo of the receipt. Bank transactions are not the same as a receipt – you should always try to keep receipts as well.

 

Q&A: VAT and Corporation Tax

 

Q: Quick question on flat rate VAT, if I have VAT income (or VAT profit), is this subject to Corporation Tax?

Income you receive from the Flat Rate VAT Scheme is income to your business and is included in the calculation of your annual profit. Your annual profit is subject to Corporation Tax. So, yes is the answer.

 

Q: If I’m not VAT registered, If I purchased a meal for example, that has VAT – so how would I record it as an expense? As a whole amount with the VAT? Or record separately the VAT and non-VAT amount?

You include the whole amount paid, inclusive of VAT, in your account. But as you are not registered for VAT you do not reclaim any VAT on expenses you have paid.

 

Q: What’s the penalty for submitting VAT returns late?

It can be quite complicated and depends if it’s your first “offence”. There are penalties and surcharges you can face if you don’t pay in time or you knowingly pay the wrong amount. We explain these in our HMRC and Companies House late filing and payment penalties article.

You’ll need to file a VAT return every three months. If you don’t file a return when it’s due, you’ll incur a penalty from HMRC.

If you’re a Crunch client, our software automatically generates your VAT return. You’ll be notified when a return is ready. After you review the VAT return and are happy it’s correct, you file with HMRC directly from our software.

If you’re not a Crunch client then you’ll need to use HMRC approved software to file your VAT return as the government’s MTD for VAT scheme came into force on 1st April 2019.

 

Q: Is there a rule-of-thumb relationship between turnover and expenses which would reduce Corporation Tax?

As a limited company, we recommend that you claim all allowable expenses, regardless of your turnover. Allowable business expenses reduce your profits, therefore reducing your Corporation Tax bill.

 

Q: I had one more question on lowering Corporation Tax, is client entertainment included and allowable?

With certain, limited exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it’s a genuine expense of your trade or business. Tax relief is therefore not available.

 

Q: I have set up a limited company which hasn’t really kicked off. I have now received a Notice to deliver a Company Tax Return. How do I approach this?

If your limited company hasn’t traded at all (no significant transactions) then you could make your company dormant for Corporation Tax and with Companies House.

If your company has traded (received income) at all, then you will need to prepare and file company accounts, we can help with this if you need.

 

Q: How early can I pay my company taxes to HMRC?

You can pay your Corporation Tax as soon as you want – in fact, you could pay some or all of your estimated bill before your company year has ended. We’ve got an article about the benefits of paying Corporation Tax early.

HMRC pays you interest (the current rate is 0.5%) known as ‘credit interest’ for paying your Corporation Tax early. HMRC will usually pay interest from the date you pay your Corporation Tax to the payment deadline. The earliest HMRC will pay interest from is six months and 13 days after the start of your accounting period.

Read our handy article for full details on what you have to file, and when, as a limited company director.

 

Q&A: Starting a business and company structure

 

Q: I work zero hours. I want to start a side business, should I go as a sole trader or limited company? Can you backdate startup costs?

We’ve got an article “Freelancing on the side” that explains all you need to know. The decision on whether you should be a sole trader or a limited company is usually down to a few factors:

  • How much you expect to earn from the business (limited companies can be more tax-efficient)
  • How long you expect to operate the business
  • Whether you would like to have the protection of limited liability (not being personally responsible for any losses the business makes)
  • Whether the status of your business might benefit from the credibility of a limited company.

Our article “What are the advantages of a limited company?” explains these and more, and we can help get you set up and take care of all your accountancy needs at Crunch, whatever route you decide to take. Why not speak to one of our friendly advisors for a free consultation?

Whichever route you take, you should be able to backdate startup costs.

 

Q: How far back can I reclaim my expenses for setting up my company before active trading?

You can claim back expenses for up to seven years prior to forming your limited company. We explain more in our setting up a limited company article.

 

Q&A: Paying Yourself, NI, tax and dividends

 

Q: Are dividends and salary the same thing?

No, they are treated differently by HMRC and have different income tax rates as well. You can pay yourself any level of salary you choose from your limited company and this will be an allowable expense. Dividends are only allowed to be paid from company profits (after tax). Read our article “What are dividends and what taxes do I pay on them?” for further information.

 

Q: Could you explain employers National Insurance contributions and how you pay them?

If you work through a limited company you can take a salary from the company, which is an allowable business expense. If you don’t have other sources of income that tax year, we usually recommend that you set your salary at the National Insurance Primary Threshold (PT) which is £8,632 for the 2019/20 tax year. This means that you don’t pay any employer’s or employee’s National Insurance Contributions (NICs).

If you pay yourself, or any employees above the PT, your limited company will need to pay Employer’s NI at 13.8% and you (or your employees) will need to pay employee’s NI at 12%. This will be taken care of by submitting your PAYE payroll to HMRC each month.

For sole traders – you’ll only need to worry about employer’s NICs if you have employees (not subcontractors, freelancers or yourself). We’ve got articles explaining how much to take as a salary if you’re a limited company director, and also an article explaining self-employed National Insurance for sole traders further.

 

Q: Regarding National Insurance, do I have to pay NI even if I don’t Pay myself or withdraw any money from the company?

No. As in the answer above, National Insurance is only payable on salary above the National Insurance Primary Threshold. Taking a salary is usually advisable though, as it is an allowable business expense. If you leave the money in the company and the company has profits, you’ll pay Corporation Tax at 19% on those profits.

 

Q: I recently became self-employed via my registered limited company and had intended to pay myself the minimum wage for tax efficiency. I am however now considering a job offer which would put me in the 40% tax threshold. How can I best minimize my tax impact here?

It depends on your personal circumstances, generally as above, we recommend paying a salary from your limited company up to the National Insurance Primary Threshold, (which is lower than the minimum wage). As above, this would reduce the Corporation Tax liability for your company.

For individual advice on your situation, it would be best to speak to an accountant. We expect you’ll be looking to maximise the use of your personal tax allowance and marginal tax threshold. There are a number of options open to you. You’ll need to declare all your income (employed and self-employed) on your annual Self Assessment to HMRC.

Our Crunch Personal Tax Estimator can help you see your total tax liability with different sources of income.

 

Q: Does a Community Interest Company (CIC) pay Corporation Tax (if they make a profit)?

The simple answer is yes. Unlike a charity, CICs are not entitled to any specific Corporation Tax exemptions. Their profits are usually fully taxable.

 

Q: How do taxes work with dual citizenship? I am American with a visa.

This is a complex area that needs specialist advice. A UK-based limited company pays Corporation Tax on its UK and worldwide profits, while a foreign company with a UK branch office only pays Corporation Tax on the profits it makes from its UK operations. We can only advise on UK residents paying tax in the UK.

Generally though, there are rules designed to ensure that you don’t face dual taxation, but you’d need specialist advice. We can put you in touch with some specialists if you wish.

 

Q: Is there no minimum amount a limited business has to make before it has to pay tax?

Once you set up your limited company, you’ll be liable for Corporation Tax on the profits of the company. In the 2019/20 tax year, the rate is 19%. If you don’t have profits, then you won’t pay tax. You calculate your profit before tax by adding up all your company’s income and taking off any allowable business expenses. Your business expenses include items such as salaries and wages. Dividends are paid from the company’s profit after Corporation Tax is paid. There is no minimum amount of profit. If you make a profit you pay Corporation Tax.

 

Q: What is the annual cost amount I can claim for working at home through a limited company?

If you’re working from home you can claim £208 annually (£4 per week) to cover associated costs without receipts. If you want to claim more than this you would need to set up a rental agreement between your company and the property owner (even if it’s you who owns the property). This could have Capital Gains Tax implications when you come to sell your property.

Your accountant will be able to run some more complex calculations in order to establish allowable amounts. Our article on working from home explains the rules and your options.

 

Q: When should I be filing – financial years?

There are lots of filing dates to keep on top of when you’re a limited company director – they’re all outlined in our limited company director’s responsibilities article. You need to file your company’s accounts at companies house within nine months of its accounting period ending. You file your company’s Corporation Tax return with HMRC within 12 months of your accounting period ending.

 

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