Getting tax right is probably the most important aspect of running a business and one which can prevent sleepless nights. As Benjamin Frankin once said “…in this world, nothing is certain except death and taxes”
Tax on Income / Profit
How, when and at what rate your business pays tax will depend on your legal structure. There are significant differences between the different forms of business.
Sole Traders and Partnerships
These pay tax on the profits of the business, that is, the difference between what you sell and the costs of running the business (excluding what you pay yourself). Any money you pay yourself from the business is classed as “drawings” which you are taking from the profit of the business.
The amount of tax you pay will depend on the level of profits you make, not the amount of drawings you take. You will pay it in arrears when you first start up, so make sure that you put aside the money to pay your future tax bill on a regular basis. This will mean you are prepared when your tax bill arrives.
Further guidance on self-assessment and tax for the self-employed
It's essential to know also, what costs you can claim against the business as you'll save yourself money.
Limited companies pay corporation tax on the profits they make. If you are a director of the company and take a wage you are treated as an employee of the business, and the cost of this wage is deducted before the company is taxed. As a director you pay tax in the same way as an employee on any wages, but if you take also take a dividend out of the profit this is then taxed as additional personal income.
Value Added Tax (VAT)
Value added tax is an additional tax on sales and this will need to be paid once your annual turnover (sales) reaches a certain threshold. See the HMRC website for how to register for VAT.
Pay As You Earn (PAYE)
This is tax you collect from any employees and pass over on their behalf. You will need to ensure that this money is paid over to HMRC in accordance with their timescales.