Tax filing is essential, no matter how large or small your business is. When a tax preparer finds the tax filing process for small businesses easy, clients feel overwhelmed, especially first-time tax filers.
Preparation is the key if you want to reduce stress and have a successful tax season. A small business tax accountant must educate clients on how to stay prepared for the tax season, know tax laws, and share other necessary details. Additionally, clients must interact with accountants throughout the year instead of meeting them once during the tax season.
Here we will discuss the following points:
What is tax?
Tax is a mandatory fee levied by a government entity on individuals or organisations to collect revenue for different public expenditure programs. When a business pays taxes as a part of its operations, it is business tax. Whether you are a sole proprietor, partner, a part of a limited company, or a corporation, you’re responsible for adhering to a country’s tax regulations.
Types of taxes
Tax requirements vary with your business structure, income, profits, what you sell and other distinct conditions. Here are certain taxes applicable to businesses in the UK.
1. Corporation tax
Any legal entity that is either a limited company or a foreign company registered within the UK, clubs, cooperatives, and other associations is liable for corporation tax.
Limited companies pay corporation tax on their profits at 19%. From 2024, it is increasing to 25%.
When to file?
You can file the corporation tax either
● 12 months after the end of your accounting period or
● 9 months and 1 day after the end of your accounting period.
VAT is an indirect tax applicable to every business with a turnover above £85,000 annually.
The standard VAT rate on maximum goods and services in the UK is 20%. However, the government levied VAT on some products at 5% and 0%.
When to pay?
It is usually due 37 days after your accounting period. However, the VAT amount may vary depending on what you use. An annual account scheme or payments on account?
● Annual account scheme: You make advance payments four times a year. At the end of the financial year, you pay the remaining amount or reclaim the extra amount paid.
● Payments on account: You make payments twice a year.
If your company has employees, you are responsible for paying PAYE tax, which means pay as you earn, and the employer deducts it from an employee, your’s and the director’s salaries.
|Band||Taxable income||Tax rate|
|Personal allowance||Up to £12,570||0%|
When to pay?
● Pay monthly: Pay by the 22nd of the following tax month
● Pay quarterly: Pay by the 22nd after the end of a quarter payment.
4. Income tax
Income tax applies to your personal income, like your salary. If you are a sole trader, income tax counts on your business’s profit.
You don’t need to pay income tax on the following:
● £1,000 is the trading allowance for sole traders
● Your earnings of £1,000 from rental income property that is not operating under the Rent-a-room scheme
● Earnings from tax-exempt accounts like individual savings accounts
● Dividends from company shares up to the dividend allowance, currently £2,000.
When to pay?
● You need to pay your income tax with a self-assessment
● for online tax returns by January 31st.
● You can pay your income tax for paper tax returns by October 31st.
5. National Insurance
To qualify for a state pension and various government benefits, you must pay National Insurance Contributions.
|Your earnings||Class 1 rate|
|Your earnings||Class 2 and 4 rates|
|£9,569-£50,270||9% + £3.05 per week|
|>£50,270||2% + £3.05 per week|
When to pay?
● For directors, pay NICs through PAYE payroll,
● For sole traders, include NICs in annual self-assessment tax files.
Tips to prepare tax for small businesses
1. Register with HMRC
If you’re interested in submitting your tax return online, you must register with HMRC. On activation, you receive a PIN by post.
2. Collect and organise documents
Ensure you collect all receipts and important documents throughout the year and organise them accordingly to prepare for taxation. Otherwise, you may miss out on some deductions or, worst, put yourself at risk for an audit.
3. Separate business expenses from personal funds
Ensure that your business and personal expenses are separate.
Even when you report on all business expenses, if the HMRC finds you mix personal and business expenses, they can start looking at your personal funds. It is advisable to have a separate business account and credit cards to make business expenses through them.
4. Classify your business correctly
You may pay extra taxes if you fail to classify your business structure.
Tax-free allowance: £12,570 for the year 2021-22
● Income tax
|Band||Annual net profit||Rate|
|Additional rate||Above £150,000||45%|
■ For-profit over £6,475 per year – NIC Class 2 flat rate
■ For-profit between £9,501 – £50,270 – Extra 9% NIC Class 4 rate.
Private limited company
● Corporation tax
Companies need to pay 19% on their profits.
A business with employees and maintaining a PAYE scheme must pay the employer NIC after claiming any Employment allowance.
Directors paying themselves a dividend need not pay NIC on the first £2,000.
|Basic rate taxpayers||Pay 7.5% on Dividends|
|Higher rate taxpayers||Pay 32.5% on Dividends|
|Additional rate taxpayers||Pay 38.1% on Dividends|
These directors are generally self-employed and pay income tax on this share of profits.
Their tax-free personal allowance is £12,570 for the year 2021 – 22.
Partners with profits of £6,475 per year pay Class 2 NIC, and for-profits between £9,500 and £50,270 pay Class 4 NIC.
Limited liability partnership members pay tax in a similar pattern.
5. Understand the difference between net and gross income
If you don’t understand the difference between net and gross income, you can make a loss in the business. Knowing net and gross income properly will help you make a more profitable business and expand yourself over time.
For example, you invest £100 to create a product and sell it for £150. Your gross income is £50. However, after deducting all your expenses, your net income may fall below £10.
6. Reclaim business-related expenses
You must reclaim all the expenses for setting up your business like company formation costs, equipment purchases, etc. You can add them only if incurred for a business reason and don’t have a mixed purpose.
7. Be familiar with tax deductions and regulatory charges
After the Brexit and covid pandemic, there were a lot of changes in the taxation policy. The government enlisted some tax deductions for business owners to operate during this period, and you must ask your tax accountant about them.
8. Beware of tax deadlines
You cannot miss the tax payment deadlines to avoid penalties from HMRC. There will be an interest charge for payments on taxes you owe late. However, there are no penalties for late fees for a genuine reason like a disaster, illness, or theft.
There are many things to consider with the taxes, and owners can’t manage their own. Therefore, you require the right software and expert advice to stay organised, know about changed tax policies, and be aware of the deadlines.
You can also make estimations with an accountant’s help on what will come to stay a step ahead to face any consequences. Without hesitating, small business owner needs to pay for a tax advisor to save themselves from more significant tax issues and save money.