Tax for the small business
If you are starting a new or small business you will need to be aware of the tax regulations. The main areas that will affect a new or small business are income tax, national insurance contributions, VAT and corporation tax. The latter only applies to limited companies.
If you are a sole trader or a partnership you will need to pay income tax on any profits from the business. In the case of partnerships, the profits will be divided between the partners and each party will pay tax on their proportion. Profit is defined as what remains of your business income after materials, labour costs and any further overheads have been subtracted.
If you employ staff you are legally required to deduct income tax and national insurance from their salary. This is known as PAYE (Pay As You Earn). Sole traders or partnerships are required to complete a tax self assessment and pay any dues to the HMRC (HM Revenue &Customs) annually.
If you are a registered limited company, you will be liable to pay corporation tax on any profits that the company makes. The company directors will still pay income tax on their salaries. If the company makes sufficient profit it can pay the shareholders a dividend. It may be the case, that shareholders who work for the company pay themselves a lower salary and a higher dividend, because dividends are not eligible for National Insurance contributions.
National Insurance contributions
National Insurance contributions are required to support state benefit schemes such as retirement, unemployment and incapacity benefits. If you employ staff, it is your duty to ensure that these contributions are made. Self employed people have a separate contribution scheme.
Value Added Tax (VAT) is a tax on most sales, services and imports. It is paid at each stage of the production and distribution process. Some goods are exempt from VAT, these include insurance and education services. If your turnover is above the compulsory VAT registration threshold and offers services which are not exempt, you will need to register your business for VAT. You will then be required to charge VAT on the products and services you offer. You can also claim back VAT on services and supplies that you have purchased for your business.
Tax for your business can appear a complicated issue. HMRC or a qualified accountant should always be the first point of call for any questions you may have.
HMRC have developed some e-learning products that you may find useful:
- Starting Your Own Business
- Tax Advice for the Construction Industry
- Exporting Goods (UKTI)
- Trading with other EU countries (UKTI)
- Tax Advice for Childminders
Page last updated: 23 February 2024