Filing tax returns accurately and on time is a central part of running a business effectively. Knowing your income tax from your corporation tax is a good place to start.
It’s a legal requirement for all businesses – including the self-employed – to file tax returns with HM Revenue & Customs (HMRC). The types of tax you have to pay depend on your type of business.
Unless your tax affairs are very simple – and you’ve got a lot of spare time – it’s a really good idea to hire a professional tax adviser or an accountant. They can save you a lot of pain, as well as the potential penalties for getting it wrong.
Here’s our guide to tax basics for businesses
The golden rules of tax for companies are:
- let HMRC know that you’re liable to pay tax;
- pay in full by the right deadline;
- file the right paperwork and keep accurate records.
Income tax
All employees, self-employed people and partners in a business partnership need to pay income tax. If you’re an employee, your employer does this for you through ‘Pay As You Earn’ (PAYE). Otherwise, you’ll need to fill in a tax return each year. The tax year runs from 6th April to the 5th April in the following year.
There are three income tax bands for 2014-15:
| Taxable income (£) | Tax rate |
| 1–31,865 | 20% |
| 31,866–150,000 | 40% |
| Over 150,000 | 45% |
You only pay income tax on income over your personal allowance. Most people have a tax-free personal allowance of £10,000.
If your employer doesn’t manage your income tax for you, then the first thing to do is register for a self assessment tax return with HMRC. They’ll send you a paper form, or you can file your return online.
If you miss the deadline, you’ll have to pay a penalty.
You can get advice from HMRC on self assessment at https://www.gov.uk/personal-tax/self-assessment.
If you’re an employer, you also have to deduct income tax from your employees through the PAYE system. See HMRC’s guide at https://www.gov.uk/business-tax/paye.
Corporation tax
Limited companies need to pay corporation tax, which is a tax on profits.
There are three corporation tax bands from 1st April 2014:
| Profit (£) | Tax rate |
| 1–300,000 | 20% |
| 300,000–1,500,000 | 20-21% |
| Over 1,500,000 | 21% |
A business needs to complete a Company Tax Return for corporation tax online, and also send your calculations and accounts in a particular format. If you’re not sure how to do this, it’s a good idea to hire an accountant to act as your agent and make sure it’s submitted properly.
HMRC has guidance on all aspects of corporation tax at https://www.gov.uk/business-tax/corporation-tax.
National Insurance
National Insurance contributions (NICs) are paid to HMRC along with income tax. They’re paid on both wages and benefits.
A business has to deduct NICs from employee wages through PAYE, and pay an employer contribution.
The self-employed, including partners in a business partnership, also pay National Insurance contributions. The amount you pay depends on your profits.
See HMRC’s guidance at https://www.gov.uk/national-insurance.
VAT
Value added tax (VAT) is a tax paid on the value added to products or services when they’re sold on for a profit.
If your turnover is £81,000 or more, you must register for VAT – this means you need to charge VAT on your sales and can claim back VAT on your purchases.
There are three rates of VAT, depending on the goods or services you provide:
| standard | 20% |
| reduced | 5% |
| zero | 0% |
Read guidance from HMRC about VAT at https://www.gov.uk/business-tax/vat.
Other types of tax
Other types of tax a business might have to pay include:
- Capital Gains Tax (CGT) – if you make a profit selling business assets like premises or shares, or even ‘intangible’ assets like goodwill. You get an annual tax-free allowance (the ‘Annual Exempt Amount’) which is £11,000 for 2014-15.
- Stamp Duty Land Tax – if you buy business premises worth more than £150,000 (or less than this but with an annual rent over £1,000)
- Business rates – if you have business premises such as a shop, office or factory
- Excise duties – if you make or import goods like alcohol, tobacco or fuel
Tax relief
There are quite a few ways you can reduce your tax bill by claiming allowances. For example, you can claim for investments in equipment (‘capital allowances’) – especially if it’s energy-efficient – or money spent on research and development.
Your accountant or tax adviser can help.
This article is provided only for general informational and educational purposes. It is not offered as and does not constitute legal or other professional advice on the subject matter in question. You should not act or rely on information contained in this website without first seeking professional advice on the subject matter in question.
