When you start a business there are (unfortunately) a number of taxes and cash flow issues to think about.
But with an accountant’s help you can set up a smooth-running system to keep HM Revenues & Customs happy.
There are four main types of tax that apply to the majority of businesses: income tax, national insurance, corporation tax, and VAT.
If you pay too little income tax, or pay it too late, you may incur interest
To keep cash flow stable the general rule is to save around 20-25% of your turnover to meet income tax and national insurance liabilities.
Income tax
If you, as the business owner, are registered as self-employed then you will need to complete a tax return every year. You can either work out how much tax you owe on your own or fill in a form and submit it to HMRC.
Tax returns are issued in April every year and cover the previous year, from 6 April to 5 April.
For your employees you can establish a PAYE (Pay As You Earn) system. PAYE is applied to all salary and wages, overtime, shift pay, bonuses, expenses, statutory sick pay and maternity pay, and redundancy and compensation payments. It is the employer’s responsibility to deduct tax from wages and pay it to HMRC.
If you pay too little income tax, or pay it too late, you may incur interest.
National insurance
National Insurance Contributions (NICs) go towards contributory benefits such as the NHS and state pension. Again, it is the employer’s responsibility to collect the deductions and pay HMRC.
NICs have different rates of contribution. Class 1 NICs are calculated by earnings; Class 2 are for the self-employed and paid at a flat rate; Class 3 are voluntary contributions and are paid at a flat rate; and Class 4 are for self-employed people who have made less than a certain amount in a year.
Corporation tax
This is paid by limited companies and is based on their profits. It is not payable by the self-employed.
First off you must tell the HMRC that your company exists, after which it keeps records of all company expenditure and income.
There are two rates of corporation tax: the small companies’ rate and the main rate. Small companies pay corporation tax on profits up to £300k; the main rate taxes profits of £1.5m and above. If you fall between the two you can opt for marginal relief.
VAT
Value Added Tax (VAT) applies to most transactions that involve the transfer of goods or services.
You must register your business for VAT if you supplied services worth £61k in the previous 12 months. If you’re below the threshold then you can register voluntarily. This will give you increased credibility, but it means you’ll need to start keeping VAT records.
You will need to keep records of the VAT you charge on sales, which is output tax. Similarly, keep records of VAT paid on purchases, which is input tax.
