Understanding the basics of UK Business Tax is a must for anyone starting out on their own – whether you are doing some self-employed freelance work, setting up as sole trader or registering a limited company. This guide will help you get started.
It is vital to keep full and accurate records of your income and expenses from the start. Keeping records makes sound business sense and is a legal requirement. So it is important to get a proper system in place from the outset, and update the information regularly.
Keeping good records makes completing your tax return(s) easier and quicker; makes it easier to pay the right tax at the right time; and helps you avoid paying unnecessary interest and penalties. You should keep invoices and receipts to show what you have bought and sold relating to your business. If you are employing others, you must keep records of their wages and tax/National Insurance you have deducted/paid to HMRC.
Keeping bank statements and building society books is vital, especially if you don’t have a separate business account. You should be able to show clearly what you have spent personally (on non-business related items) and what is spent on the business. If you use cash, you will need till receipts and a record book to keep track of it all.
If you are using part of your home for business then you should keep copies of the utility bills so that you can work out the amount spent in relation to your business.
Additionally, if your business is registered at Companies House, you must keep and retain certain accounting records showing your company’s transactions and its financial position. If you have an accountant you might want to get his or her advice on what system suits your business and on how to keep your records up-to-date.
Keeping records is important because you can face penalties for failing to keep proper records. You face further penalties if you send us a return that contains an inaccuracy caused by carelessness, such as not keeping proper records.
For more information visit www.gov.uk/self-employed-records
Find out about mobile apps for record keeping at www.hmrc.gov.uk/softwaredevelopers/mobile-apps/record-keeping.htm
Self-employed and Self Assessment Tax
This means that you’re working for yourself, although you can also have people working for you. Your Income Tax, and part of your National Insurance liability, is calculated by reference to your business profits. The calculation and payment of the tax/National Insurance due on profits is done through Self Assessment.
If you have employees you will have to operate (Pay As You Earn) PAYE on their earnings.
For your 2013-2014 Tax Return onwards, you can choose to use the ‘cash basis’ and ‘simplified expenses’ methods to simplify your tax affairs. To find out more, go to www.gov.uk/self-employed-records
If you are self-employed, you pay Income Tax through Self Assessment. After the tax year ends on 5 April, you will need to complete and file a Self Assessment tax return, which you can either do online or by filling in a paper form. There are different deadlines for the paper and online returns.
Self Assessment tax return deadlines
- Filing by paper – the return needs to be with us by 31 October. A paper return received after that date may be charged a penalty.
- Filing online – the return needs to be with us by the following 31 January. This gives you an extra three months. Remember, if you send it in late you may be charged a penalty.
About three quarters of Self Assessment customers already file their return online. As well as the later deadline, we recommend filing your return online because:
- It is secure and convenient
- You can stop, save and come back to it at any point
- Calculations are done for you automatically
- It shows you immediately if you owe any tax
- It calculates any repayment due and processes it quickly (more quickly than the paper equivalent filed at the same time)
- You get automatic acknowledgement of safe receipt.
Completing your return if you are a self-employed individual
To complete your return you will need information from your business records, receipts or bank statements. If you get stuck, there is advice available. You can visit www.gov.uk/self-employed-records.
You are responsible for working out how much Income Tax and National Insurance contributions you need to pay. However, if you do your return online, your calculation is automatically done for you. If you choose to send HMRC a paper return, HMRC can still calculate your tax for you but only if you make sure your return is received by the 31 October deadline.
For help with completing and filling in your return online see the guide at www.gov.uk/file-your-self-assessment-tax-return or find out more about the online Self Assessment tax return at www.gov.uk/how-to-send-self-assessment-online
Alternatively you can get an accountant or tax adviser to do all this for you. Please remember, if you do this, it is your responsibility to make sure the information on the return is accurate, complete and received by HMRC in time.
A partnership is where two or more people jointly set up a business. Each partner is personally responsible for all the business debts, even if the debt was caused by another partner. Each partner pays Income Tax and National Insurance on their share of the business profits through their own Self Assessment tax return. The partnership nominates one partner to be responsible for sending the Partnership Tax Return to HMRC.
Completing your return if your business is run as a partnership
Each partner will have to fill out a partnership supplementary page as part of their own, individual Self Assessment tax return. The nominated partner will also have to complete a Partnership Tax Return, showing each partner’s share of the profits or losses. This might also include completing other supplementary pages, depending on what type of income the partnership has.
Everyone who completes a Self Assessment tax return gets a Self Assessment Statement. This shows you how much you owe and how to pay any tax due. It also shows you how much you have paid or how much we have repaid to you since your last statement. If you have registered for our Self Assessment Online service, you can also view your statement online and set up a Direct Debit as a single payment or as part of a monthly or weekly Budget Payment Plan.
Paying your tax at the right time
From your second year of trading, HMRC may ask you to make payments on account. These are part payments (or commonly referred to as payments on account) towards your next tax bill. These payments on account are based on the amount of tax that was due in the previous year. Certain conditions apply as to whether you need to make payments on account.
You will usually make two separate payments, one on 31 January and on the following 31 July, as well as any balancing payment on 31 January. If there is any balance to pay this will be due at the end of the following January.
To find out more about when payments on account are due, visit www.gov.uk/understand-self-assessment-statement
A limited company is legally separate from its shareholders or directors. This means the company is liable for any debts. The company must pay Corporation Tax on its taxable profits and needs to deliver a Company Tax Return – usually annually. This return must be filed online with any Corporation Tax paid electronically.
You can set up your own company and register it at Companies House or you can also use a company registration agent to buy a company ‘off the shelf’. There is more information in this booklet under Corporation Tax.
If you form a limited company, then as a director, you will also be an employee – so you need to set up and register a PAYE scheme. You can do this by visiting www.gov.uk/paye-for-employers
As a director, you will still need to complete a Self Assessment tax return. Managing tax and accounts for limited companies can be complicated. A solicitor or accountant will be able to offer advice on setting up a limited company. Visit www.gov.uk/limited-company-formation for a number of useful guides about Corporation Tax.
If you are running a limited company then you may need to pay Corporation Tax. Corporation Tax is a tax on your company’s overall taxable profits. For more information about who is liable for Corporation Tax, visit www.gov.uk/limited-company-formation/overview
HMRC will send an Introductory Pack to newly formed companies. This helps to make it easier for companies registered under the Companies Act to give HMRC the information it needs to set up their tax records with the right information.
As a director of a limited company, you are also an employee of the business and need to pay tax on your salary (including benefits in kind, dividend income and other income derived from the company) and operate PAYE and National Insurance contributions for yourself and all employees.
Corporation Tax is due for ‘accounting periods’ which are normally 12 months long.
To work out how much Corporation Tax your company will have to pay, you will need to work out the profits you’ll have to pay tax on. For more information on accounting periods and calculating your taxable profits for Corporation Tax, visit www.gov.uk/prepare-file-annual-accounts-for-limited-company
All Company Tax Returns must be filed online and use the Inline eXtensible Business Reporting Language (iXBRL) data format for accounts and computations in most cases. Corporation Tax and related payments must also be paid electronically. HMRC provides a free software product for those with straightforward affairs and there is also a range of commercial software available, or you may wish to ask an agent to file your return on your behalf.
If you are setting up a limited company you need to do a number of things:
- Tell HMRC that your company is active for Corporation Tax purposes within three months of starting. The easiest way to tell HMRC is online using either the joint registration facility in the Companies House Web Incorporation Service or HMRC’s online registration service
- Visit www.gov.uk/limited-company-formation/set-up-your-company-for-corporation-tax
- Complete a Company Tax Return for your company within 12 months of the end of the accounting period. You can do this online at www.gov.uk/prepare-file-annual-accounts-for-limited-company
- Giving your business the best start with t 14 ax: Limited Companies
- Work out how much Corporation Tax the business owes and pay it, without assessment by HMRC
- Set up a PAYE scheme and operate PAYE on all wages paid to employees (including directors).
There is a lot to know about Corporation Tax and many people choose to use an accountant to help them manage this. You can also get help with the basics at www.gov.uk/running-a-limited-company
It is your responsibility (even if you employ an accountant) to make sure all necessary tax returns are completed on time and that you pay any tax you owe by the due date.
If Corporation Tax is paid late or you don’t pay the right amount, your company will be charged interest on what’s owed or paid late.
VAT is a tax charged on most business-to-business and business-to-consumer transactions in the UK and throughout the European Union (EU).
Who charges VAT and what is VAT charged on?
VAT is charged only by someone who is registered for VAT – usually a business but other organisations may have to register as well. They charge VAT on:
- Goods and services sold or otherwise supplied (eg barter) in the UK
- Goods, and some services, imported from places outside the EU
- Goods and services coming into the UK from other EU countries.
You must register for VAT if your turnover for the previous 12 months is over the VAT threshold or if you think your turnover may soon go over this limit (this limit is normally increased annually and can be found at www.gov.uk/vat-registration-thresholds). You may register voluntarily at any time. There are few exemptions from registration.
For information on registering for VAT and when you do not need to register visit www.gov.uk/vat-registration
How is VAT charged and accounted for?
For items which are standard-rated or reduced-rated for VAT, VAT is charged to the buyer (output tax) by the VAT-registered seller. This VAT is reclaimed by the VAT registered buyer (input tax) after goods and services are purchased.
If you are registered for VAT, generally you charge VAT on your business sales and reclaim VAT on your business purchases. The difference between the VAT you charge and the VAT you are reclaiming is the amount of VAT you must pay to HMRC. If the value of the VAT you reclaim is more than the value of the VAT your charge, then HMRC pays you.
If you are not registered for VAT, you do not charge VAT on your sales. You still pay VAT on your purchases and you cannot reclaim this VAT.
You usually account for VAT on a quarterly basis by filling in a VAT Return and sending it to HMRC. If you register a business for VAT you must submit your VAT Return online and pay any VAT due electronically. You can pay online by Direct Debit (which gives you longest to pay), CHAPS, Bacs, internet banking and telephone banking.
Remember that registration is compulsory when your ‘taxable turnover’ is more than the current VAT threshold. Most VAT registration applications can be done online. For more information visit www.gov.uk/vat-registration/ how-to-register
There are simple schemes to help small businesses manage their VAT.
Annual Accounting Scheme
This scheme can help you to manage your cashflow and reduce your paperwork. You pay your VAT in instalments and submit one annual return along with a final balancing payment.
You can submit VAT Returns, pay by Direct Debit and give notification of changes to your registered business online. For more information visit www.gov.uk/vat-annual-accounting-scheme
Cash Accounting Scheme
This scheme can help with your cashflow, as you only pay VAT when your customer has paid you. You can only reclaim VAT on purchases when you have paid for them.
For more information visit www.gov.uk/vat-cash-accounting-scheme
Flat Rate Scheme
This scheme helps make record-keeping easier and helps reduce the amount of time you spend accounting for VAT. You calculate your VAT by applying a flat rate percentage to your turnover. Help with choosing the right scheme for you is available at www.gov.uk/vat-flat-rate-scheme
National Insurance for the self-employed
National Insurance contributions are paid by almost everyone who works for a living and count towards paying for pensions, benefits and healthcare. Not paying for your National Insurance contributions puts your rights to benefits at risk.
If you are self-employed, there are two types of National Insurance contributions you need to know about – Class 2 and Class 4:
Class 2 National Insurance contributions
Class 2 National Insurance contributions are a fixed amount per week. We recommend you pay by monthly Direct Debit. To pay monthly or six monthly by Direct Debit go to www.gov.uk/pay-class-2-national-insurance and fill in the Class 2 Direct Debit form. Otherwise, we will send you a six monthly payment request . If you are in a partnership, or if your spouse is self-employed too, then each person pays their own Class 2 National Insurance contributions.
Class 4 National Insurance contributions
These are also payable by most self-employed people. They are calculated as a percentage of your annual business profit, but you only start paying Class 4 contributions when your profits reach a certain limit.
Your Class 4 contributions are calculated alongside your Income Tax liability, based on the figures you reported on your Self Assessment tax return. You pay the Class 4 contributions at the same time as your Income Tax. If you are in a partnership, or if your spouse is self-employed too, then each person pays their own Class 4 National Insurance contributions.
If you employ staff, or are a Director (and therefore an employee) of a company, you also need to know about Class 1 National Insurance contributions which apply to employee earnings.
What if you don’t earn much?
If you do not expect to have profits above a certain amount. Visit www.gov.uk/self-employed-national-insurance-rates for the relevant form and details of how to submit an application. You should be aware that if you do apply for SEE this will affect your entitlement to benefits.
If you do not apply for a SEE, you must pay Class 2 contributions from the start of your self-employment. You can always claim a refund if you find out later on that your earnings were lower than expected, as long as you make your claim in writing no later than 31 January following the end of the tax year.
For this year’s National Insurance contributions rates and SEE threshold visit www.gov.uk/national-insurance/how-much-national-insurance-you-pay
National Insurance for Employers and Employees
Class 1 National Insurance contributions
This is payable by most people who are employed and their employers. If you are an employer, you are responsible for deducting Class 1 contributions from your employees and for paying those and your own share over to HMRC.
Class 1A and Class 1B National Insurance contributions
These are payable on benefits provided by the employer. The cost of these is fully borne by the employer.
Class 3 National Insurance contributions
These are voluntary payments, made by people who want to pay, and are entitled to pay, contributions to help them qualify for benefits. These payments cover any shortfalls in your National Insurance contribution record and help protect your entitlement to State Pension and Bereavement Benefit.
Can you pay too much National Insurance?
Yes, it is possible. You might be paying too much National Insurance contributions if, for example, you have more than one job. If you think that you will be paying too much in National Insurance contributions overall, then you can apply to postpone (or defer) your Class 2 and Class 4 National Insurance contributions until the end of the tax year. If you do end up paying too much, HMRC will send you a refund. You can find out more about how to claim back overpaid National Insurance contributions by visiting www.gov.uk/defer-self-employed-national-insurance
Employing other people (PAYE)
If you plan to employ other people, you need to get everything sorted out well in advance regarding their pay and tax.
As an employer, you will be responsible for calculating and paying to HMRC your employees’ PAYE (Pay As You Earn) tax and Class 1 National Insurance contributions. You will also have to pay your own employer’s share of the Class 1 National Insurance contributions together with Class 1A or Class 1B contributions where appropriate in respect of benefits provided. Then there are other things you need to know about, such as the National Minimum Wage and ensuring your workers are eligible to work in the UK.
You may also need to make other payments or deduct Student Loan repayments on behalf of your employees. This may seem like a lot to manage, but don’t worry, there is lots of advice and help available at www.gov.uk/browse/employing-people
To watch the online presentation ‘First steps as an employer’ go to www.hmrc.gov.uk/webinars/index.htm
If you are a director of a company, are about to employ someone, or have already taken on you first employee, you will need to register as an employer with HMRC. You can register online at www.hmrc.gov.uk/payerti/getting-started/register.htm
If you do register – but for whatever reason you don’t employ anyone – you must let HMRC know or we will assume you should be making payments of employee tax and National Insurance contributions and you may get an estimated bill.
When you have registered we will send you your PAYE reference number and information about how to download the HMRC Basic PAYE Tools to help you run your payroll. A P11 Calculator will work out and record your employees’ tax, National Insurance contributions and any Student Loan deductions. The P11 Calculator enables you to keep your payroll records electronically and file your Employer Annual Return and in-year forms online direct from the P11 Calculator if you have up to and including nine employees at 5 April.
From April 2013 employers are operating PAYE in real time, which means they have to send HMRC PAYE information every time employees are paid, at the time they are paid. It must be done electronically using payroll software as part of their routine payroll process. For more information on PAYE online and PAYE in real time go to www.gov.uk/paye-for-employers
To download this guide direct from HMRC, click here >>At Bizorb we aim to provide the most accurate and up to date information to you. This article contains public sector information licensed under the Open Government Licence v1.0. If you spot any errors in this article please let us know.