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Tax is a way of life, when running your own business you'll need to pay tax. Below is a basic introduction into the main types of taxation:
For many people one of the most daunting aspects of starting a new business is working out what taxes you will need to pay and how to deal with HM Revenue and Customs (HMRC).
Below is a guide to the main taxes that you need to consider:
National Insurance Contributions (NIC)
Depending upon how your business is set up there are different categories of NIC. Sole traders and partners in a partnership are liable to pay Class 2 and Class 4. Class 2 NIC is currently £2.80 per week.
Directors of limited companies are liable to pay Class 1 contributions on their salaries and a company is additionally liable to pay Class 1 contributions as well as Class 1A on the benefits that directors receive.
'Pay As You Earn' (PAYE)
The PAYE scheme ensures that tax is deducted from employees wages within each pay period. This will effect you if you employees or if you are a director.
In most circumstances you will need to complete a Self Assessment Tax Return. If you are self employed (including being a member of a partneship), a company director or if you receive income over a specified level for property, overseas, investments or savings.
Value Added Tax (VAT)
The standard rate for VAT is 20%. VAT is charged on most goods and services in the UK and you are required to register for VAT if the value of your taxable turnover exceeds £83,000 in a 12 month period from 01 April 2016. Voluntary registration is possible and in some circumstances advantageous.
For more information on VAT registration thresholds click here (external link)
If you set up a limited company or limited liability partneship you will be taxed on the profits earned in your financial year. The tax rate for small companies is currently 20% and becomes payable nine months and one day after your year end.
For more information on Corporation Tax click here (external link)
Deciding when your business year starts and finishes?
It's important to choose a year end that suits you and your business. Many people choose either 31 March or 5 April to coincide with the end of the tax year, however this may not be the best choice for you. You can change your chosen year end.