Demystifying Business Taxes: Types, Bands, and Payment Rules
All businesses are subject to a range of tax brackets. This article aims to provide an insight into the tax liabilities that may apply to various kinds of businesses. This article does not constitute financial advice and the types of tax described may not necessarily apply to your business. It is always recommended that you seek professional financial and legal advice that is suited to your specific business needs. Furthermore, for additional insight into various company legal terminology, please check out our three-part series on “How to Register a Company” here.
Income Tax
Income tax is a tax imposed on the profits and incomes generated by a business or individual per tax year, which runs from April 6th to April 5th of the following year. The income tax imposed on a business will depend on whether your company is structured as an unincorporated business or as an incorporated company.
Any profit generated by an incorporated company will be subject to income tax. An incorporated company’s employees, including the director of the company, must also pay tax on their earned income.
When operating as a sole trader or in a partnership (an unincorporated business structure), any profit generated by your business will be subject to Income Tax, with the exception of a personal allowance. Each year, sole traders are provided with a personal allowance which is not taxable. The full personal allowance applies with the assumption that there are no other means of income for the sole trader.
A sole trader’s tax rate is dependent on their income. The table below shows the various tax bands for Income Tax rates for sole traders for the financial year of April 2022 to April 2023.
For more information on Income Tax, click here.
National Insurance Contributions (NIC)
National Insurance Contributions (NIC) are taxes imposed on earnings or self-employed profits (for sole traders), and are paid either directly by employers, or are deducted from employee wages. The taxable amounts are dependent on your business structure, as follows:
Partnership - where shared profits exceed £6,025 per annum, there is a class 2 fee and where profits exceed £8,164, there is a class 4 fee.
Self-employed or a sole trader - like a partnership, there is no need to pay on earnings until the business is profitable at more than £6,725 per annum (class 2) or £11,909 (class 4). Click here for more information on self-employed National Insurance rates.
Limited company - Here, all members are classed as employees. Employees pay NIC under Class 1. The rates change upon the level of earnings. You can find the class 1 rates here.
Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption tax added to goods and services paid by all consumers and received by VAT-registered companies. Regardless of your business structure, you must register your company for VAT where your company’s VAT taxable turnover is more than the £85,000 per year threshold. A company’s VAT taxable turnover refers to the total value of everything sold or supplied by that company, excluding any VAT-exempt amounts. Where yearly VAT taxable turnover does not exceed the £85,000 threshold, a company may still choose to register for VAT, as ‘voluntary registration’.
Remember to register for VAT in time. You should register your company for VAT within 30 days of your company reaching the VAT taxable turnover threshold, and you may register your business online. For more information on VAT registration click here.
Corporation Tax
Corporation tax is a tax imposed on limited companies’ profits. Profits generated by a limited company are subject to a 19% tax, and are imposed on trading profits, investments, and selling assets such as property or shares for a chargeable gain.
If your company’s profits are expected to exceed £1.5 million, Corporation tax is paid in quarterly instalments. If your company’s profits are not expected to generate over £1.5 million.
You must pay any Corporation tax which your business is liable for on time. If your Corporation tax is paid late, underpaid, or not paid at all, HMRC will charge your business a daily interest rate known as late payment interest.
Your company’s Corporation tax is not delivered as a bill. You must take the required steps to calculate and pay your Corporation tax to HMRC.
Make sure you register your company with HMRC for Corporation Tax. You must do this within three months of incorporating your business with Companies House, unless it is dormant. If you restart a firm, you must notify HMRC by re-registering for Corporation Tax. You will need the Unique Taxpayer Reference (UTR) you obtained from HMRC when you registered your business with Companies House to register for Corporation Tax.
Make sure to keep up-to-date accounting records so that you are able to draw up a Company Tax Return to determine how much Corporation tax you are liable for. You must pay your Corporation tax within 9 months and 1 day after your accounting period has ended.
Your company’s accounting period is the time provided by your Company Tax Return.
Your Company Tax Return must be filed within 12 months of the accounting period's conclusion and accompanied by financial statements. Penalties are imposed automatically for late returns. For further information on Corporation tax please click here.
Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is a tax on the profit earned when you sell or dispose of an item or asset that has appreciated in value. The gain you inherit, rather than the amount you receive, is taxed.
CTG is particularly relevant if you own a start-up business which you think will considerably appreciate in value in the next few years and for which you are planning an exit strategy. CGT applies to not only the business you may sell or exit, but to its associated assets, such as offices and Intellectual Property.
Disposing of an asset could entail the following:
selling it;
gifting it or transferring it to another person -swapping it for something else; or
receiving money for it, such as a refund from an insurance company if it's been lost or destroyed.
The current tax-free allowance is £12,300, and is payable on the 31st of January following the end of the tax year in which the gain was made.
If you have CGT to pay, you must report this to HMRC by sending a Self-Assessment tax return. The latest date you may register by is October 5th after the end of the tax year for which you require a tax return. If you fail to inform HMRC of any CGT to pay before the deadline, you may have to pay a penalty. For more information on CGT please click here.
- Authors: Tanisha Shah, Rita Almazuri and Sofia Martiello
- Authors: Tanisha Shah, Rita Almazuri and Sofia Martiello
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DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article
Sources
British Business Bank, ‘Tax for Start Ups | Start up Loans’ (Start Up Loans Company) <https://www.startuploans.co.uk/tax/> accessed 3 June 2022
GOV, ‘Capital Gains Tax’ (GOV.UK 2022) <https://www.gov.uk/capital-gains-tax/what-you-pay-it-on> accessed 3 June 2022
Gov, ‘Register for VAT’ (GOV.UK 2022) <https://www.gov.uk/register-for-vat#:~:text=You%20must%20register%20if%2C%20by> accessed 3 June 2022
Government Digital Service, ‘National Insurance Rates and Categories’ (GOV.UK 12 June 2014) <https://www.gov.uk/national-insurance-rates-letters> accessed 3 June 2022
Oppong T, ‘5 Taxes to Consider When Starting a New Business in the UK’ (AllTopStartups 21 February 2020) <https://alltopstartups.com/2020/02/21/5-taxes-to-consider-when-starting-a-new-business-in-the-uk/> accessed 3 June 2022
Start Up Donut, ‘Essential Guide to Business Tax’ (www.startupdonut.co.uk 2022) <https://www.startupdonut.co.uk/tax-and-national-insurance/how-to-work-out-tax-and-ni/essential-guide-to-business-tax> accessed 3 June 2022
The Startups Team, ‘Capital Gains Tax Explained’ (Startups.co.uk 4 April 2011) <https://startups.co.uk/tax/capital-gains-tax-explained/> accessed 3 June 2022
