“…in this world nothing is certain
but death and taxes.”
Benjamin Franklin
So you’ve kept all your receipts, added up your books
and now you need to pay your tax. But when? And how?
Lots of new businesses don’t know how they will be taxed
and I get asked about this all the time. There are four main
taxes that affect UK businesses:
- Income tax
- Corporation tax
- National insurance (NI)
- Value added tax
We’re just going to talk about Income tax and NI for the
time being
Income tax for sole traders and partnerships
If you’re self-employed as a sole trader or as a partnership
you’ll need to fill out a self assessment form so the
Inland Revenue can work out how much tax you need to pay. If
you’ve just started up, make sure that you’ve told
the Inland Revenue that you’re self-employed (you can
call them on 08459 15 45 15) otherwise you won’t be able
to claim expenses against income and risk getting a nasty fine.
Once the Inland Revenue know that you’re self-employed,
they’ll send you out a mass of documents, most of which
probably won’t apply to you. If you started your business
in July 2005, your tax year will run up to the end of March
2006, and you need to get the documents back to the Revenue
by the end January 2007 at the very latest, otherwise you get
a £100 fine for being late.
Lots of people do their tax return online now, and this calculates
your tax automatically for you, even if you’ve waited
until January. If you prefer to do it on paper, get your return
in by September, otherwise you’ll have to work out
all the sums yourself, and I’m sure you’ve got better
things to do.
Once you’ve got the paperwork in, you’ll find out
how much you need to pay. Some people find it useful to save
up about 20% or so of their income each month (more if your
profits are more than 30k a year) and pay that into a savings
account so they don’t find that they’ve got a tax
bill and no money to pay it. You pay your tax in January and
July of each year, so do make sure that you’ve put the
money aside. I saw a successful business go under because the
owner spent all the profits, and then got a tax bill for the
first year of trading which he couldn’t pay. The days
when the Inland Revenue gave you time to pay are long gone,
so don’t assume everything will be okay
Income tax
for limited companies
If you’re working as a limited company, you are counted
as being an employee of your business, so you pay your income
tax under the PAYE system. This is one of the disadvantages
of the limited company route, and because this is a bit of a
headache with the bookkeeping, many people pay a small sum each
month to get someone else to do this for them.
Key things to remember
- Get in the habit of getting your books up to date regularly,
once a month at least. I know it’s boring, but see
it as a therapeutic activity that will make you feel good
once you’ve got it done.
- You only pay tax on profit. Profit is income less expenditure,
so the more expenditure you have the less tax you pay. But
the Inland Revenue will only accept certain types of expenditure,
and they know what different types of businesses are likely
to spend. So don’t try it on – a few pounds
is not worth the hassle of a tax audit.
- Keep your receipts if you pay 40% tax then every £2.60 bus ticket is worth £1.04. You wouldn't throw a pound away, so don't throw those bus tickets away either.
National Insurance
If you’re a sole trader or in a partnership, you’ll
pay a regular amount of National Insurance each month, usually
by direct debit. This is set up when you tell the Revenue that
you’ve self employed. There’s an extra amount of
NI based on your profits which is calculated when you do your
tax return.
If you’re a limited company you pay national insurance
with your PAYE, just the same as if you were employed by someone
else.
Free tax guides
If you would like to find out more about how tax might affect
you, The Joy of Business has a number of guides that we’ll
be happy to send to you if you email us. If you have complex
issues around tax, then my best advice is to talk to an accountant
– everything here is for guidance only, and while we are
experts in how to make a business successful, and we do love
numbers, you really need to speak to a specialist to get the
right advice for your business.
Julia Chanteray
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