Taxes are fees charged by the government to individuals, businesses, or on goods and services in order to derive funds for government expenditure. The taxes you will have to pay will depend on the structure of your business, revenue, income, and performance. Exploring opportunities in open banking and considering revenue-based loans can also impact the financial aspects of your business and, consequently, influence the taxes you may incur.
Taxes can be quite confusing, so a little knowledge is essential so that you can get your taxes right. As a small business, here are some taxes you might have to pay.
Income tax, like the name suggests, is tax accrued on one’s income. The way income tax is paid or charged will be different for different business structures.
According to UK tax laws, a sole proprietor pays personal income tax on the profits earned from their business. The value of your taxable profits is derived when you fill out your Self-Assessment tax return. Sole trader’s tax is paid when profits surpass £12,500 (the personal allowance in the UK), the business owner is below the age of 75 and has no other sources of income.
Your business attracts a 20% income tax rate when you earn between £12,501-50,000 and a 40% tax rate when you earn between £50,001 and £150,000. Businesses with earnings above £150,000 are charged a 45% tax rate.
● Income tax on dividends and salary
Small businesses registered as limited companies pay income tax on dividends or salary received. The amount of tax paid depends on the amount of salary or percentage of dividends you receive. The first £5000 earned from dividends are not taxed, and salary below the primary threshold attracts no tax.
Value Added Tax (VAT)
Value Added Tax is charged on goods and services. All business structures – sole proprietorships, partnerships, or limited liability companies – start to pay this type of tax when they make more than £85,000 on sales on VATable goods.
VATable goods refer to all goods and services that would have attracted a VAT charge if the business had been registered for Value Added Tax. The standard rate of VAT is 20%, 5% is the reduced rate, and some goods attract a 0% VAT charge.
This tax is charged to limited companies only. Corporation tax is paid on profits made by the company. Profits may stem from revenue or sales of company assets and investments. Corporation tax is presently 19% of company profits.
A limited company must register for corporation tax within three months of the start of the business. Make sure to keep up with trends in the amount to be paid, so you don’t pay less or more. There are some reliefs on corporate tax that you can benefit from.
Capital gains tax
This form of tax is paid when you sell a company asset to for a profit, i.e. when it has increased in value. It is important to note that you will only be taxed on the portion of that sale that is profit, or more than the original sale, not the entirety of the sale.
Business rates are charged on the use of shops, warehouses, offices, and other commercial buildings. Even your home may attract a business rate if you modify it significantly for commercial purposes.