Everything You Need to Know About Business Tax

Running your own business is an exciting prospect but there are a number of things that you have to manage correctly. This is particularly true when it comes to tax because you have to ensure that you pay the right amount of tax to HMRC. If you don’t pay the right tax or make errors then you could find yourself facing hefty fines. So, what do you need to know about business tax?

Business Tax - What Do You Need To Pay?

There are many different types of taxes that you will have to pay as a business owner. The tax you pay and how you pay it will depend on the structure of your business. As a result, if you are a sole trader, your tax bill will differ from the tax bill of a limited company.

Corporation Tax

If you own a limited company then you will need to pay corporation tax on all profits. This is calculated after salaries and expenses have been paid but is also calculated before dividends are given out. There is no personal allowance for companies which means that tax has to be paid on all profits. The corporation tax rate is 19%, regardless of how much profit the company makes.

To pay this tax, you will need to submit a company tax return which is due 12 months from the end of your company accounting date. Furthermore, it is down to the company to declare how much corporation tax should be paid as HMRC won’t tell you how much to pay.

Value Added Tax

VAT is added to a whole range of services and goods and most things will have the standard amount of VAT added to it which is 20%. If your company is VAT registered then you will have to charge customers VAT on top of the price of goods or services. However, if you pay VAT on business expenses then you will be able to reclaim this.

Not every company has to register for VAT although it is possible to voluntarily register to be VAT registered. However, if your company has a turnover of more than £85,000 then you have to register.

When it comes to paying VAT, it now has to be done using Making Tax Digital which means that all VAT returns have to be done using MTD-compatible software.

Business Rates

If your business is located in a shop, factory or warehouse and any other location away from a domestic property, then you are likely to be charged business rates. This is much like council tax but these business rate charges are also calculated by local authorities. The bills are usually sent out around February or March time and they will inform you of what you have to pay for the financial year.

These rates are calculated using the rateable value of the property which is linked to the estimated rental value on the open market. There are some instances where you can be charged business rates, even if you run your business from home. If you have staff who work from your home, you sell goods or services that require people to visit the property or you have made adaptations to the home such as converting a garage then you might have to pay business rates.

The business rates have to be paid to the local authority and will be split across ten payments.

Dividend Tax

If you are a shareholder of a company, then you can receive payment in the form of dividends. The first £2,000 is free of tax but any dividends paid beyond this will have to have dividend tax deducted from it. How much dividend tax you pay will be determined by your income tax band. For basic-rate taxpayers, the amount is 8.75%, for higher-rate payers the amount is 33.75% and for those who pay additional-rate tax, the amount is 39.35%.

If your income comes from dividends only then you can use your personal allowance along with your dividend allowance. This means that for the 2022/23 tax year, you can use your £12,570 personal allowance as well as the £2,000 dividend allowance, giving you a total of £14,570 in earnings before you pay any tax.

Income Tax

Business owners won’t have to pay income tax for the business but income tax is applicable to individuals. Therefore, they will have to pay 20% income tax on wages between £12,570 and £50,270 for those who earn more than this will have to pay the higher rate of 40% while there is also an additional rate of 45%.

If you are a sole trader then you will pay income tax on profits made from the business and this will be done through a self-assessment tax return to HMRC.

National Insurance

If you run a business that employs people then you will need to pay the employer’s portion of National Insurance contributions to HMRC. Businesses will pay 15.05% for employees earning more than £9,880 per year.

Capital Gains Tax

This tax is applicable if you sell something for a profit and so, for individuals there will be possessions related to the business. For business owners, this will relate to the sale of assets, shares or the company.

The rate that is paid will depend on individual income tax so basic rate taxpayers will pay 10%. Those who pay higher-rate and additional-rate tax will pay 20%. One thing to consider is that capital gains will go towards your income for the year and so, if you do make a large profit this could push you into a higher tax bracket.

There is a lot to think about when it comes to tax and running a business but it is vital that you have a clear understanding of what tax you have to pay. If you fail to pay the right amount then HMRC will take action and depending on how much tax you owe, you could find yourself facing time in prison.