Taxes in the UK can be dauntingly complicated, but entrepreneurs starting up their business typically don’t need to memorise the entire tax code. Here is a breakdown of five tax payments that every entrepreneur should be aware of.
Income tax is payable on your business profits if you are a sole trader. You will start paying income tax once your profits go over your personal allowance, which is £11,500 for the 2017/18 tax year. Note that this assumes you don’t have any other income, such as a salary, on top of the revenue from your business.
National Insurance Contributions
Though National Insurance Contributions (NICs) aren’t technically a tax, it is a payment you are obliged to make to the government that is similar to taxes. Being self-employed typically involves paying two kinds of National Insurance. Once your yearly profits exceed the Small Profits Threshold, you must pay Class 2 NICs in the form of a weekly fee – £2.85 for profits over £6,025 for the 2017/18 tax year. If profits exceed the Lower Profits Limit, NICs are calculated as a percentage – currently 9% of profits between £8,164 and £45,000, and 2% over that.
Note that if your business is a limited company from which you draw a salary, you and the company count as employee and employer, respectively, and are both liable to pay Class 1 NICs as a percentage of weekly earnings. The rates for the 2017/18 tax year are:
- Employees: 12% of weekly earnings between £157 and £866; 2% over £866.
- Employers: 13.8% of weekly earnings over £157 per week.
Limited companies are subject to a corporation tax rate of 19% on their profits. Sole traders don't pay corporation tax.
If your business makes over a certain amount from “VATable” sales per year, it will need to be registered for VAT. The current threshold for the 2017/18 tax year is £85,000. Most of VATable sales are subject to the standard 20% rate, although reduced rates of 5% or even 0% can apply to some sales. Goods and services that are considered quasi-essential typically fall under the reduced VAT rate.
Similar to council tax, business rates are paid on the property that you run your business from. If you run your business from home you typically won't need to pay business rates on top of your council tax, unless you only use your work area for business and no longer for any domestic purposes, such as a workshop used by yourself and employees coming to and from the property.