Topic overview

Tax and National Insurance

Using a calculator - Tax and National InsuranceIf you want to run a legitimate business, you must pay tax. It's well worth understanding your tax obligations before you start up. That way you can make provisions and then concentrate on the more exciting aspects of running your business.

Income tax, National Insurance contributions and VAT

Self-employed people pay tax on their business profits (not personal earnings), as well as Class 2 and Class 4 National Insurance contributions (NICs).

People running limited companies are employees, which means they must pay income tax through the company's Pay As You Earn (PAYE) scheme, as well as employee NICs.

The company must also pay Corporation Tax to HM Revenue & Customs (HMRC) each year, which, for many small limited companies, amounts to 19% of their profits after expenses and allowances have been accounted for.

Another consideration is value added tax (VAT), which is levied on the sale of most goods and services (there are exemptions). If your turnover exceeds the VAT threshold (£85,000 in a 12 month period since April 2017), your business must be VAT registered. Once registered, you charge VAT to your customers and fill in a quarterly VAT return, submit it online to HMRC and pay your bill.

Keeping tax records

To remain within the law (and run your business effectively), you must keep accurate financial records, detailing all money entering and leaving your business. These accounts must be kept for at least six years - even if the business ceases trading.

If you put a robust system in place from day one, then simple bookkeeping needn't turn into a nightmare - even if number crunching isn't your thing.

So what do you need for bookkeeping? You will need:

  • a cash book;
  • a sales ledger;
  • a purchase ledger;
  • a wages book.

Accounting software

For most businesses, these 'books' are now managed through accounting software. Financial software packages offer a quick, cheap and convenient way to keep financial records. They can also reveal vital management accounts information, to help owner-managers run their businesses more effectively.

Minimising your tax bills

Every business owner is keen to keep tax bills low. There are strict rules about business expenses that owner-managers should be aware of, so that they can be sure to claim everything they are entitled to claim.

There is also a range of tax allowances and reliefs. For example, money you invest in machinery and fixtures and fittings for your premises can be claimed as a capital allowance. Even money you spend before the business is officially launched can be claimed as a business expense, as long as you notify HMRC.

Finding a business accountant

Of course they rarely provide their services for free, but a good accountant can help your business save tax. The odd useful piece of advice, tailored specifically to your needs, could minimise your tax liabilities.

Accountants can also make filling out forms and dealing with HMRC less painful, which alone can be well worth the accountancy fees.

To find a good business accountant, ask your network for recommendations or try the professional bodies such as ACCA, ICAEW or ICAS, before shortlisting and interviewing a few candidates to find the best fit for your business.