So you’ve just started your own business, but you’re a little daunted by the thought of accounts & tax. This blog will enlighten you on what taxes you have to pay, and when, and what to do to register for them.
Registering as a sole trader or partnership
You should contact HMRC as soon as you become self-employed on the newly self-employed helpline. They will ask for some personal details and description of your business. Following this call, they will issue you with a Unique Taxpayer Reference which can be used by you or your accountant to complete your tax return. Once HMRC have registered you, you will also be required to start paying Class 2 National Insurance Contributions at £2.40 per week (2010/11 rate).
Registering your limited company
You will need to register your new limited company with Companies House. The registration process is outside the scope of this blog, but there is plenty of information on the internet to guide you through incorporation, or your accountant can do it all for you. Once you have registered at Companies House, you should notify HMRC of the new limited company. HMRC will then send you a pack containing Corporation Tax forms and new company details forms which you should complete and return to them.
Taxes you pay as a sole trader or partnership
As a sole trader or partner, you will be taxed on the profits you make from your self-employment, and any other income you bring in, for example through employment or savings. We will come to how we calculate your profits later in this guide, but broadly it is the income you make less the expenses you incur, and does not take into account what money you have or have not taken out of the business. In a partnership, you would be taxed on your share in the partnership profits.
The good news is that the first £6,475 you earn (2010-11 rate shown) is tax free. This is known as your personal allowance. The next amount of income you earn, up to £37,400 (2010-11 rate shown) is taxed at 20%, and anything above that is taxed at 40%. There are some special rules for high earners (over £100,000), but these are outside the scope of this blog.
Taxes you pay as a limited company
As a limited company, you will be required to pay corporation tax on the profits of the company. Broadly this is the income you make less the expenses you incur, but you are better off asking an accountant to prepare this for you, to make sure the profits take into account all allowable expenses.
Companies do not have a personal allowance, so tax is payable on all your profits. The rate for small companies (with profits under £300k in 2010-11) is 21%. In addition to this, you will have to pay tax personally on any money you have taken out of the business. Directors often take a mix of salary and dividends as this is considered to be the most tax effective method of withdrawing funds from a company, and your accountant will be able to advise you on the best amounts to take out.
If you would like any advice in this area or any other areas of accounting or tax, please contact me on 01767 260282 or amy@tayloraccountancy.net, www.tayloraccountancy.net.
Amy Taylor Accountancy takes every care in preparing material to ensure that the content is accurate and up to date. However no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Amy Taylor Accountancy You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances and properly implemented.