An introduction to tax, national insurance and VAT
The amount of tax you need to budget for and then pay, depends on your business structure.
The two most common business structures for small business are:
* Self Employment (also known as Sole trader)
* Limited Company
Tax Payable for Self Employment (& When)
Class 2 National Insurance
For the 2015/16 tax year (6 April 2014 to 5 April 2015) you pay £145.60
Unless you have been approved for a small earnings exception certificate (profits under £5,965) then you will pay Class 2 contributions even if you make a loss.
Class 2 National Insurance is collected with Class 4 national insurance and income tax from 2016 and has transitioned to an annual payment structure.
Class 4 National Insurance
Once your profits have exceed £8,060, you begin to pay Class 4 National Insurance at 9% on a sliding scale.
For example – if you have £10,000 profit for the tax year, you would pay Class 4 National Insurance at 9% on £1,940 (£174.60) which is payable in line with self assessment deadlines 31 January after the end of the tax year).
The 2015/16 Income Tax Allowance is £10,600 therefore you do not pay income tax until your profits reach this level. However, if you have employment income at any point in the year, this is also included in your £10,600 allowance.
If your business is registered as a limited company, it is liable to pay corporation tax on any profits the company makes. The directors of the company pay income tax on their salaries, as do any other employees.
The Corporation Tax rate may change each year on April 1st. The current rate payable is 20% on profits of £300,000 and under. Above £300,000 the rate is 21%.
You do not have to register for VAT (Value Added Tax) until your turnover is £82,000. However, you can register for it voluntarily if you wish. You will then need to charge VAT on all your income and submit quarterly VAT returns (unless you elect to submit an annual return if you meet the criteria).
If you sell BTE products (Broadcasting, Telephone and E-Services) to other EU countries, you may need to pay the applicable VAT for those countries which is done via registration for MOSS (Mini One Stop System).
If you are looking at going down the limited company or voluntary registration for VAT, I strongly advise you have a chat to an accountant first.
This guide to small business tax and VAT was written in conjunction with
Kylie Fieldhouse ACA CA (AUS)
Getting started with Income Tax and National Insurance
If you are self-employed, you will need to pay Income Tax and National Insurance on what is known as taxable income.
Taxable income is mainly the profits you make from working for yourself. This means you pay tax not on the entire income you make in your business but the difference between the income you make and the amount you spend on expenses for running the business.
You will pay Income Tax and National Insurance throughout the HMRC Self-Assessment system and will need to complete a tax return following the end of every tax year.
As soon as you start in business you will need to register with HMRC.
Once you have registered, HMRC will send you a Self-Assessment Unique Taxpayer Reference which you will need to quote whenever you contact them.
The deadline by which a tax return is due to be completed and sent to HMRC is dependent upon whether you choose to send your tax return in on paper on online. Paper returns must reach HMRC by 31st October and online returns by 31st January following the end of the tax year to which the tax return relates.
There are late filing penalties if you don’t send in your tax return on time.
There are also deadlines for paying the tax you own. If you don’t pay on time, you may have to pay interest and late payment penalties.
You must maintain adequate records when you are self-employed such as retaining invoices you have issued and keeping receipts for any purchases you have made for the business.
Records should be organised in separate accounting periods. The last date of an accounting period is known as your accounting date. This is the date that you will close your accounts each year. Your business accounts will be prepared from the details recorded during your accounting period.
Whichever accounting period you choose, having a good record keeping system in place will make things easier when you come to complete your Self-Assessment tax return.
When doing your tax return, you can deduct your business expenses from your income to reduce the amount of tax you have to pay.
Basic business accounting
Every business, no matter how large or how small, needs to keep accounts and review them at regular periods in order for them to known how much profit or loss they have made. They will also be able to use these figures to help predict the future of their business and if any financial problems are looming. This is why every figure should be recorded and accounted for, down to the last penny. Here are a few tips for you to set up some basic business accounting.
Choose a basic business accounting system
Be consistent with your accounting system. Choose one system and stick with it. If you run a number of different accounting systems, things are in danger of getting missed and lost. It does not matter whether you use a manual system or automated software, just keep everything in one place.
Keep records up to date
It is all too easy to leave sorting out your records and accounts until a later date but the longer you leave it, the more difficult and cumbersome it will be. Keep track on a daily basis if possible of everything you have spent and earned in that day. As an absolute minimum, book out time each month to collate your figures. The longer time period you leave, the more difficult to remember what those odd expenditures relate to. Have a system for keeping your receipts and invoices in order until you come to the time of recording them.
Balance the books
Each month, print off your bank statements and double check the money in and out against your accounting records. This is where you will be able to identify if you have properly accounted for everything coming into and going out of the business. Again, don’t leave it longer than a month to check or it is all too easy to forget what has happened where there may be an error.
Have a backup in place
You may swear by a manual paper system but think what would happen in the worst case scenario and your office suffered from a fire. Also, paper is easy to lose. Log all your paper entries on to a computer database and ensure you carry out a regular backup. Alternatively, you may wish to use one of the many cloud based accountancy software packages which will prepare accountancy reports for you and have inbuilt backup in case of disaster.
By getting a basic business accounting system in place from the start will save you time and effort when it comes to your end and the preparation of your financial accounts. And your accountant will thank you for it too.