Startup owners need to think every time before taking a step. Tax is something that no one likes except an accountant, but if not done correctly can bring turmoil in business. Remember that whenever you make an income above the personal allowance threshold in the UK, you are bound to pay tax to HMRC.
Taxes get complicated for startups due to insufficient time organising financial records, having multiple income channels, irregular cash flow, etc. An entrepreneur can never be a master of all trades, and it’s good to leave your tax preparation to experts.
Suppose you are willing to start a tech business; try hiring a tech startup accountant UK as they understand your business and tax requirements more than you do. These professionals are life savers.
Read this guide to understand how to prepare for your first tax season!
Table of contents
What are startup taxes in the UK?
Regardless of your business type, you must know the business structure and file your taxes accordingly.
● Corporation tax
If you are running a business as a limited company, you must pay corporation tax on your profits. The rate will rise to 25% (19% in 2022-23) from April 2023.
However, different the annual profit is not more than the new £50,000 threshold, a 19% Corporation tax rate will be applicable. Companies with a yearly profit of £250,000 or more need to pay a 25% corporation tax rate.
If your business is VAT-registered, you must pay VAT. Businesses making an annual turnover over the VAT threshold (£85,000 for 2023-24) must register for VAT. We pay VAT on almost every item at a standard rate of 20%, while there are others at 5%, 0%, and VAT-exempt.
● Business rates
You pay business rates when you run a business from an office or other property.
However, make sure you know a few locations are exempt from paying business rates, like farms, and others may receive a business rates relief.
● Income Tax
Though it is not a tax paid by your startup, as a startup founder, you must pay income tax on your personal earnings. You start paying taxes when income exceeds the UK’s Personal allowance threshold (£12,570 for 2023-24).
|Earnings between £12,571 and £50,270||20% basic rate|
|Earnings between £50,271 and £150,000||40% higher rate|
|Earnings over £150,000 (£125,140 for the tax year 2023-24)||45% additional rate|
How to complete your first tax return?
Tax returns are dreadful events that nobody likes, but everybody must know and get it done.
However, you must stay prepared for tax season, and listed below is how you submit the first tax return.
1. Register for tax
Companies are usually automatically registered for corporation tax after setting up. However, for any reason, if your company is not, you must register for tax online via gov.uk or ask your accountant to register it. Most tax returns are now paperless, and online modes make filing tax returns and payments convenient.
Once you register for tax on the government website, you will receive a UTR (Unique Taxpayer Reference) number in the post and your activation code.
2. Enter accurate financial details
Make sure all details on your tax return are accurate and you have the proof ready to support them. Check all your bank statements, financial records, invoices and bills, and payslips during the tax year of business, and fill your return accurately.
While submitting your first tax return, HMRC will throw a set of questions towards you that helps in filling out the right sections of the tax return form.
It is best to leave this part to a startup accountant
3. Claim tax-free allowances and business expenses
You must include all your business expenses, like the cost of buying equipment, paying electricity and utility bills, etc., on the tax return. Understand you are taxed on profits and not on your turnover. Therefore, deduct the business expenses from your annual profit to calculate the actual profit.
HMRC offers multiple tax-free allowances to UK businesses like annual investment allowances, employment allowances, etc. Look for your eligibility and don’t forget to claim these allowances on your tax return.
4. Submit your tax return and pay the bill
Once you complete your tax return, double-check the entries before final submission to HMRC. Any uncertainty in your numbers can call for an investigation.
Tips for filling your tax return
Filing a tax return seems daunting without prior knowledge or basic understanding. Here are a few tips for first-time taxpayers:
- Keep your business and private funds separate, and don’t mess up your expenses
- Organise your financial transactions, record them accurately, and ensure they are updated regularly
- Automate your calculations and accounting tasks with HMRC-complaint software
- Keep your invoices, bills, and bank statements handy while filling out your tax return
- Don’t wait for the last minute to prepare your taxes
- Make sure you are claiming tax-reliefs and deductions
- Start saving a little at a time for taxes
- Don’t forget your tax deadlines
- Ask professional help
The initial years of a business remain sensitive; if you are not prepared to stand straight under any circumstances, even a small storm can break your backbone. An entrepreneur may be skilled in running a business, but there is a team of professionals behind every startup success story. If you are not ready to prepare taxes, hire an expert, or outsource.