Business owners and self-employed persons are unlikely to have an in-depth knowledge of national insurance and tax rules when first starting out, but you do need to learn the basics in order to cover yourself when it comes time to pay-up. There are a few key facts that are vital to any person in charge of the financial affairs of a business, or looking after their own finances as a self-employed individual.
Tax and NI for Self-Employed Persons – You pay tax on any business profits, not earnings. Every year a self-assessment tax return must be accurately filled out and returned to HMRC, with tax payable on profits generated in the preceding 12-month accounting period.
For National Insurance Class 2 must be paid at a flat rate of £2.85 per week and is collected through the self-assessment process. Class 2 NI is to be abolished during the current parliament period. Class 4 NICs (National Insurance Contributions) are linked to profit, with the lower limit at £8,164 and the upper limit being £45,000. This is paid at the same time as the self-assessment tax bill.
Tax for Limited Companies – The employer must set up the PAYE system for all employees, with tax and NICs deducted via the company payroll, and the company also paying employer’s NICs for its staff. The level of income tax for employees is linked to a pre-tax income banc. 20% is payable on wages up to £33,500, with 40% payable above that amount.
There are different forms of tax allowance, including a personal allowance of £11,500 before tax is taken. 19% of company profits must be paid annually as Corporation Tax and is due within nine months of company year-end.
Tax Allowance and Business Expenses – Once you have told HMRC that you have started your business you can claim the majority of expenses as pre-trading costs. There are strict rules as to what counts as a legitimate business expense, reliefs or allowances. Most commonly they include stock and materials for work purposes, wages, vehicle and travel costs, administration and personal fees.
You can claim capital allowances on plant and machinery and fixtures and fittings for business premises. Another thing you can claim for is the cost of using your vehicle for business, either at a fixed mileage rate or an actual expense.
VAT Rules – Value Added Tax (VAT) is a tax levied on the sales of most goods and services with the standard rate set at 20%. You must become VAT-registered if your turnover exceeds £85,000. All businesses pay VAT on most purchases, with Vat-registered businesses charging VAT on all of their goods and services, paying HMRC the difference between the tax charged and the tax they pay.