Understand the five business taxes

Running a business, no matter how seemingly small, is a huge responsibility. Not only do you have to pay attention to making sufficient profit from your products and services, but you have to ensure that you’re not breaking any laws at the same time. Falling short of your necessary commitments, or crossing one line too many could result in huge fines or even jail time. Not only is this detrimental to you as an individual, but it could also have extensive negative repercussions on your company. Bankruptcy or tarnished reputation are just two things that you’d need to worry about. So, it’s important that you know your way around basic business law or at least know where to find the professionals who can give you a helping hand. Here are a few areas to consider.

Tax Law

Tax law is used in near enough every commercial, corporate or personal transaction. Your business is likely to engage with plenty of these over each and every tax year. It is a huge source of income for authorities such as governments and is massively complex. It would be nigh on impossible for you to learn all of the ins and outs of tax law at the same time as running a business. So if you do find yourself in trouble or at the centre of a dispute about taxes, you may be best off contacting a reliable solicitor, such as Slater Heelis. They will be able to offer you in-depth expertise and advice concerning the intricate and unique details of your individual case. However, it’s always a good idea to have a basic understanding of tax law yourself in order to avoid getting into a predicament in the first place. There are five main taxes that you will need to understand in particular when running a small business, as you will need to pay them at some point or another. These are: income tax, national insurance, corporation tax, VAT, and business rates.

Income Tax

Income tax is essentially what it says in the name: a tax charged on your income. However, the income that you do have to pay tax on and the income that you don’t have to pay tax on vary. You will expect to pay income tax on money earned from employment, profits you make if you are self-employed, rental income, and income from a trust. You don’t have to pay income tax on interest from savings or ISAs, the first £5000 of dividends from company shares, premium bond or national lottery wins, or rent from a lodger in your home that’s below the rent a room limit.

National Insurance

As a business owner, you will have to pay national insurance tax. This is essentially a contribution towards particular benefits you receive in society, as well as a state pension. Anyone aged 16 or over who is earning above £157 a week, you absolutely have to pay national insurance. The rest is essentially means tested. You will fall into one of various classes depending on your employment status and income. If you are employed and earn over £157 a week, you fall into class 1. National insurance payments will be deducted automatically from your wages by your employer. This may not apply to you, but it is something that you should be aware of if you have employees. Class 2 consists of self-employed individuals earning over £6025 a year. You’re likely to fall into this category if you are starting out or establishing your business. You can, however, if you please, move yourself from this position into class 3 by making voluntary contributions towards national insurance. Class 4 is where you should aim to be. This is the category for self-employed individuals earning over £8164 a year in profits. If you are a business owner, you will be self-employed. So rather than the tax being taken out of your earnings PAYE, you’ll have to conduct a business and personal income self assessment and file a tax return at the end of every tax year. 

Corporation Tax 

Corporation tax is the tax applied to profits from doing business as a limited company, a foreign company with a UK branch or office, or a club, co-operation or other unincorporated association. When you start doing business, you will need to register your company for corporation tax. This can be done directly through the gov.uk website. You will then need to keep accounting records and put together a tax return. This will allow you to work out how much corporation tax you need to pay. You will then need to file this return and make your necessary payment by the given annual deadline. This is absolutely necessary, even if you make a loss or simply break even. Working out corporation tax can be difficult. Especially if you are inexperienced or not great with numbers. But not to worry. You can find a reliable accountant to undertake the task on your behalf. This is likely to be much more reliable, which will result in fewer problems, wrong payments being sent through, or claims of tax avoidance down the line.


VAT stands for value added tax. All goods and services are determined to be either VAT rated or VAT exempt by authority figures and ruling bodies. Goods and services that are considered necessities, such as children’s clothing and shoes, CE marked cycle helmets, electricity and gas for domestic and residential use, and building services for disabled people, are VAT-exempt. If something is considered a luxury, the provider or distributor must add VAT to its price. Different goods are charged at different levels. However, for most VAT rated items, the general charge will be around 20%.

Business Rates

Business rates are taxes paid on non-residential properties. These include commercial properties such as shops, pubs, factories, and offices. If you are operating a business from a given location that you do not live in, you’ll be liable to pay business rates. You can find out more about the rules and regulations of this here.

These are just the basics of tax for businesses. However, even if you’re just aware of their existence, you’ll have a much easier time remembering them and ensuring that you pay them effectively and on time.

*This is a contributed post

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