What taxes do you pay when running a business
The tax year runs from 6 April to 5 April. Different taxes have different payment schedules. The following are the different taxes and when the payment of the tax is due. If you require any further information on taxes Archimedia Accounts will be able to assist you or your business.
Corporation Tax is a tax on the profits made by a limited company over the financial year. It must be paid nine months and one day after the business’s accounting period ends. There are often adjustments needed to be made to the company’s accounting profits before arriving at a taxable profits figure.
If a company has distributable profits, these are profits after the corporation tax is taken away the company is legally allowed to pay its shareholders dividends. Dividends are taxed on the individual shareholders, whereby the tax is declared on the individual’s income tax return and the relevant tax is paid. You do not pay tax on any dividend income that falls within your personal allowance, this is the amount you can earn without paying tax. You also get a dividend allowance no matter how much you earn. You only pay tax on any dividend income above the dividend allowance.
There are different dividend tax rates for basic, higher, and additional-rate taxpayers. The good news is that income tax on dividends is lower than the rate you will pay on money from work or a pension. You can also use your tax-free dividend allowances, meaning you can earn more income from your investments before you will start paying tax.
You do not pay tax on dividends from shares in an ISA.
Income tax is paid on income you receive personally, such as salary, dividends. If you are a limited company director, income tax is paid through your business’s PAYE scheme. For sole traders and partnerships, income tax will be paid based on the profit made from the business which is included on your self-assessment tax return.
National Insurance helps to build up your state pension and pay for public services. As is the case with income tax, National Insurance will be taken via PAYE for limited company directors.
Employees pay Class 1 national insurance contributions above the primary threshold. Employers are also expected to pay Class 1 NICs (known as secondary contributions) for earnings of each employee who earns more than the primary threshold.
The national insurance payment process for sole traders and partners is a little different. Essentially, it is calculated as part of the annual self-assessment and paid to HMRC by January 31 and as part of your payment on account (July 31). Class 2 and Class 4 NICs are charged at different rates. The Class 2 National Insurance contribution is a fixed weekly amount, and it is only charged if your annual profits are above a certain level. Class 4 National Insurance contributions are only charged if your profits are above a certain level and is a percentage of your profits above this level. The percentage is reduced once a taxpayer reaches the higher rate band for income tax.
Value Added Tax is added to the cost of goods and services. Companies aren’t registered for VAT automatically, and unless your annual turnover exceeds the VAT threshold for any one tax year it doesn’t need to be paid. If you do need to pay VAT, it needs to be paid quarterly, with VAT returns submitted to HMRC within 37 days of the end of the quarter.
Tax obligations for sole traders and partners on the individuals share of the profits
As long as you’re earning less than your tax-free personal allowance you won’t need to pay any income tax. Depending on the level of profit in your business you will be taxed at the basic rate of tax or higher rate of tax. You will also need to send a self-assessment tax return every year.
Tax obligations for limited companies
Limited companies are required to send Companies House an annual tax return, compile statutory accounts, send a company tax return to HMRC, and register for VAT if the business sales are above the VAT threshold for any particular tax year. In addition, a director of a limited company is required to return a self-assessment tax return and pay tax/National Insurance through PAYE if they receive a salary.
Tax obligations for partnerships
Partnerships have similar tax obligations to sole traders. Firstly, partners are required to pay income tax on their share of the business’s profits They also need to pay National Insurance, send a personal self-assessment tax return, and register for VAT if the business sales are above the VAT threshold for a particular tax year. In addition, the nominated partner is required to send a partnership self-assessment tax return on an annual basis.
Tax obligations for limited partnerships and limited liability partnerships
Partners of a limited partnership or limited liability partnership need to send a partnership self-assessment tax return every year and register the partnership for VAT if the business’s earnings meet or exceed the threshold. Furthermore, each partner is obligated to pay income tax on their share of the company’s profits, send a personal self-assessment tax return, and pay National Insurance.
Note, this article was written in March 2021, please take this into consideration if there is any year-specific information. We do not take legal responsibility for anyone using this advise without an Accounting & Tax Professional.