Startup tax essentials: Understanding your tax obligations from day one

When you embark on the path to operate your own business, one thing is certain – you will face various taxes along the way.

The UK tax system is known for its complexity, so knowing which taxes apply to your business and the necessary payments to HMRC can be difficult. However, complying with startup tax regulations is necessary to prevent penalties and legal complications.

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In this context, we’ll explore the top business taxes you should be well-versed in as a company owner.

From income tax to VAT and National Insurance contributions, we will shed light on the key tax obligations that may apply to your company and offer advice for managing your tax responsibilities efficiently.

Let’s dive into the fundamentals of small business taxes to assist you in staying informed and proactive in satisfying your tax obligations.

Table of content

What is business tax?
Types of business tax
Final thoughts

What is business tax?

Business tax encompasses different kinds of taxation that have to be proactively paid by the company’s entity.

Ensuring timely and precise tax payments is essential, as failure to comply, unintentionally or deliberately, can result in serious legal consequences.

To protect yourself against potential tax issues and maximise contributions, seeking the knowledge of tax law professionals is highly recommended.

These professionals are crucial when discovering opportunities for tax optimisation, possibly offsetting their fees in the long run.

 Any savings made in fees can then be reinvested into the expansion and growth of the business.

Types of business tax

There are several types of business taxes, some of which may be industry-specific. For businesses operating in the UK, the following taxes are of primary concern:

1. Income tax
Income tax for sole traders is based on the revenue gained by their business. If you have no other sources of income, like a regular job salary, you will start to pay income tax on your company’s profit once it goes above the personal allowance threshold.

For people under 75 years old, the personal allowance for the fiscal year of 2022/2023 will be the same as the rate of taxation in 2021/2022, which is £12,570.

In the instance of a limited company, income tax applies to the salary or dividends taken by the company’s owner. The total income tax you pay depends upon the total sum withdrawn.

For individuals receiving a salary, income tax comes into effect when the salary exceeds £12,570, and you have no additional income sources (applicable to 2022/23 rates).

However, if your circumstances differ—for instance, if you have another job besides working for your company—you might start paying taxes on your salary earlier.

2. Corporate tax
UK corporation tax rates for the financial year beginning 1 April 2023 is:

  • 25% for profits above £250,000.
  • 19% for profits below £50,000.
  • 26.5% on profits between £50,000 and £250,000. This provides a gradual increase in the effective Corporation Tax rate.

3. National Insurance
Often regarded as a form of tax, National Insurance comprises different contributions.

Sole traders, for example, make a weekly flat-rate ‘Class 2’ National Insurance contribution.

Self-employed people and entrepreneurs must also pay National Insurance contributions based on their earnings.

These contributions fund state benefits like the state pension and the national healthcare system (NHS).

4. VAT (Value Added Tax)
Value Added Tax (VAT) is a consumption tax factored into the cost of a good or service. Companies are not automatically registered for VAT; they start collecting VAT when their annual revenue exceeds the present VAT threshold, which stands at £85,000.

VAT payments usually occur every quarter, and companies must submit VAT returns to HMRC within one month and seven days after the end of that particular quarter.

Even if there is no VAT to be recovered or paid, registered companies must file a quarterly return.

5. Dividend Tax
If you own shares in a business, you can give yourself dividends. From 2022-23 until 2023-24, the first £2,000 of dividends is tax-free, decreasing to £1,000 after 2023-24 and £500 after that.

Any dividends received beyond these limits are liable for dividend tax, calculated based on your income tax bracket.

For the tax year 2022-2023, basic-rate individuals pay 8.75% dividend tax, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%.

Since 2021–2022, these rates have increased from 7.5% for basic-rate taxes, 32.5% for higher-rate taxpayers, and 38.1% for additional-rate taxpayers for dividends.

If dividends constitute your sole income source, you can benefit from both your personal allowance and dividend allowances.

6. Business rates
Business rates are useful to most companies. If you work for your company from home and use just a tiny amount, like a single room, you may be exempt from paying business rates.

However, you can be liable for business rates if a sizable portion of your property is set aside for commercial use, such as a shop with living quarters above it.

The amount of business taxes you must pay is calculated based on the value of your property.

If commercial property costs rise in your area, your rates may climb accordingly. You can use the HMRC calculator to estimate how much you’ll pay.

However, any possible rises in your bill will be executed gradually, thanks to the application of transitional relief.

7. Small business rates relief
Apart from business rates relief, you can benefit from other types of commercial rates reliefs to lower or potentially eliminate your bill. These reliefs use for different types of business properties, such as but not limited to:

  • Properties with a rateable value of less than £15,000 are less expensive.
  • Properties used for charitable purposes.
  • Properties situated in Enterprise Zones.
  • Certain qualifying pubs.
  • Some farming buildings.

To assess the company’s rates bill and the reliefs applicable to your situation, considering an accountant is recommended. They can help you evaluate whether you qualify for specific reliefs and ensure you maximise the possibilities to reduce your rates burden.

Hire Tax Accountant

Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 900 3500
Monday to Friday 9am – 5pm

Final thoughts

This comprehensive guide highlights the significance of remaining informed about changing tax rates and considering individual circumstances that may impact tax liability.

Knowing these essential startup tax aspects will enable you to navigate the tax landscape confidently and guarantee your business remains compliant and economically sound.

Startup business owners can establish a strong financial foundation and concentrate on expanding their companies with confidence by developing a clear understanding of their tax requirements from the beginning.

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