An introduction to tax, national insurance and VAT
The amount of tax you need to budget for and then pay, depends on your business structure.
The two most common business structures for small business are:
* Self Employment (also known as Sole trader)
* Limited Company
Tax Payable for Self Employment (& When)
Class 2 National Insurance
For the 2015/16 tax year (6 April 2014 to 5 April 2015) you pay £145.60
Unless you have been approved for a small earnings exception certificate (profits under £5,965) then you will pay Class 2 contributions even if you make a loss.
Class 2 National Insurance is collected with Class 4 national insurance and income tax from 2016 and has transitioned to an annual payment structure.
Class 4 National Insurance
Once your profits have exceed £8,060, you begin to pay Class 4 National Insurance at 9% on a sliding scale.
For example – if you have £10,000 profit for the tax year, you would pay Class 4 National Insurance at 9% on £1,940 (£174.60) which is payable in line with self assessment deadlines 31 January after the end of the tax year).
The 2015/16 Income Tax Allowance is £10,600 therefore you do not pay income tax until your profits reach this level. However, if you have employment income at any point in the year, this is also included in your £10,600 allowance.
If your business is registered as a limited company, it is liable to pay corporation tax on any profits the company makes. The directors of the company pay income tax on their salaries, as do any other employees.
The Corporation Tax rate may change each year on April 1st. The current rate payable is 20% on profits of £300,000 and under. Above £300,000 the rate is 21%.
You do not have to register for VAT (Value Added Tax) until your turnover is £82,000. However, you can register for it voluntarily if you wish. You will then need to charge VAT on all your income and submit quarterly VAT returns (unless you elect to submit an annual return if you meet the criteria).
If you sell BTE products (Broadcasting, Telephone and E-Services) to other EU countries, you may need to pay the applicable VAT for those countries which is done via registration for MOSS (Mini One Stop System).
If you are looking at going down the limited company or voluntary registration for VAT, I strongly advise you have a chat to an accountant first.
This guide to small business tax and VAT was written in conjunction with
Kylie Fieldhouse ACA CA (AUS)