Starting a New Business: Tax Basics
There are numerous important issues to consider when starting a new business, and one of the most important is taxation. In the United Kingdom, it is imperative that you remember that rates, thresholds and fees, as well as rules and regulations, can change annually. These changes are introduced in the Budget, and they are typically implemented at the beginning of a tax year.
During the course of a year, there are certain reports (returns) and payments that business owners must make to a variety of government agencies. Some of these payments are made at the end of the tax year, and some are made quarterly or monthly. There are also some reports that are made at the end of an accounting period.
Regardless of when a particular report or payment is due, failure to use the correct rate or allowance for the relevant tax year can result in a penalty. So, it is extremely important for business owners to have accurate and up-to-date information regarding taxation.
Employees’ pay and deductions
If you have employees, you must deduct income tax and National Insurance contributions (NICs) from their wages. You can use the PAYE (Pay As You Earn) system to do this. Both your employees and HM Revenue & Customs (HMRC) must be informed of how much is deducted each year. You are also responsible for other payroll deductions such as student loan payments.
You may utilize a quarterly payment scheme when tax, National Insurance and student loan repayments total less than £1,500 per month. For each employee who earns more than £8,500 annually (including any taxable benefits and expenses payments), you must complete a P11D. For all employees who earn less than £8,500 annually, you should complete P9D .
Income tax rates and allowances
You must pay income tax if you have employees or are the director of your own limited company. The appropriate amount to deduct from wages and salaries depends on an individual’s tax rate and taxband. You may pay taxes to HMRC through the PAYE system.
Tax rates and bands for the tax year 2007/08:
Tax Rate Taxband
Starting rate: 10 per cent £0-£2,230
Basic rate: 22 per cent £2,231-£34,600
Higher rate: 40 per cent Over £34,600
Business owners should be aware of an upcoming change in this information: Starting in the 2008/09 tax year, the 10 per cent starting tax rate will be abolished, and the basic rate will be reduced to 20 per cent.
The amount of tax free income an employee can earn in one year is known as a tax allowance. While all employees qualify for a basic tax allowance, some employees can qualify for multiple allowances.
Tax allowances for the tax year 2007/08:
Type of allowance Earnings for 2007/08
personal allowance £5,225
personal allowance (aged 65-74) £7,550
personal allowance (aged 75 and over) £7,690
income limited for age-related allowances £20,900
married couple’s allowance for people born before 6 April 1935 £6,285
married couple’s allowance aged 75 or over £6,365
minimum amount of married couple’s allowance £2,440
blind person’s allowance £1,730
National Insurance contributions (NICs)
NICs are mandatory for most of the working population in the UK. This money funds some social security benefits such as the state pension and jobseekers allowance. Different types of NICs exist, and we will discuss them now:
Primary Class 1 NICs are paid by employees once their wages reach a total above the earnings threshold, which for this NIC is £100 per week. If an employee’s wages do not total at least £100 per week, he is treated as paying NICs on the wages between the lower earnings limit (LEL)—which is £87—and the earnings threshold. NICs are at a lower percentage rate for all wages above the upper earnings limit (UEL). The UEL for Primary Class 1 NICs is £670 per week.
Secondary Class 1 NICs are paid by employers. The earnings threshold is the same as Primary Class 1 NICs—£100 per week. However, there is no UEL for this type of NIC.
Those who are self-employed need to file a self-assessment tax return each year to determine their NIC rates.
Class 2 NICs are required of most self-employed individuals. This NIC is a flat, weekly rate of £2.20. However, if you earn under £4,635 per year and have a small earnings “Certificate of Exception,” you are not responsible for Class 2 NICs.
Class 4 NICs are paid on annual profits above a certain level. The rate is 8 per cent on profits from £5,225-£34,840 and 1 per cent on all profits over £34,840.
Capital Gains Tax (CGT)
When you sell or dispose of assets, such as real estate or stock shares, the money you are paid in the sale is a capital gain. For example, you will most likely be liable for CGT if you sell or transfer a business. The first £9,200 of capital gains during the tax year 2007/08 are not taxable. This is your annual personal allowance .
VAT
VAT, or value added tax, is a tax that is payable on the bulk of business transactions involving the transfer of goods or services. You are required to register for VAT when your business’s annual turnover reaches £64,000, but you may choose to register voluntarily before your turnover reaches this level because it may benefit your business. There are different VAT payment schemes, and you should take care to choose the right one for your business. HMRC’s website offers a guide for making this choice.
Where can I go for more information?
This article is only a beginner’s guide to business taxation in the United Kingdom. For a more comprehensive explanation of tax obligations, visit the HMRC’s website, and review the information pertaining to starting a business by clicking here: http://www.hmrc.gov.uk/businesses/tmastarting-up-in-business.shtml
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