Tax basics for your small business

Unless you have had training or some kind of official education in accounting, taxes can seem awfully confusing and incredibly daunting considering you can incur fines for getting it wrong! Or worst, if you are not well organized, there are vat penalties for late payment. Here are some basics to help you get your head around taxes for your small business.

VAT

First of all, you have probably heard the term VAT thrown around a lot and perhaps you have a basic understanding of it. But if not, VAT stands for the value-added tax that is levied on the price of a product or service at each stage of production, distribution, or sale. You should also know how to calculate VAT as there are varying rates and certain exceptions that may apply.

Most goods or services attract the standard 20% but some have a reduced rate of 5% and if you are VAT registered then you must charge your customers VAT on top of your prices. But you will be able to claim the VAT that you pay on expenses. So, make sure you do your research as VAT is a big part of a company’s finances!

You will only have to register for VAT if your annual taxable turnover exceeds the VAT threshold but if you do so voluntarily then you can claim back VAT on your business purchases.

Corporation tax

Corporation tax is applied to the profits earned by a limited company, it does not apply to sole traders. It is calculated after salaries and other expenses have been paid but before any shareholder dividends are withdrawn. Companies do not benefit from any kind of personal allowance, so tax must be paid on all profits. Corporation tax has a flat rate of 19% regardless of how much profit the company makes – so making turning your business into a limited company could mean you pay less tax overall.

Business Rates

If you run your business from a property such as an office or shop, rather than from your own home, then you will probably be charged business rates on this property. Business rates are similar to council tax in the way they are calculated and sent out by local authorities.

Tax tools for small businesses automatically calculate tax bills dynamically every time new information is added are popular nowadays. These tools utilize automation and integration with accounting and financial data to streamline the tax calculation process, reducing manual errors and saving time for business owners. 

Seamlessly integrate reliable tax tools with your existing financial systems, eliminating the need for manual data transfers or importing/exporting data. Some tools support calculations for various tax types, such as income tax, sales tax, payroll tax, etc., making it easy to manage multiple tax obligations in one place. Furthermore, advanced tax tools may offer scenario analysis, allowing you to simulate different financial situations and evaluate the tax implications of each.  

Using a robust tax tool, you can also generate tax reports and documentation that can be easily shared with accountants, tax authorities, or other stakeholders. It pays to choose one with built-in reminders and deadline tracking, ensuring you never miss important tax filing dates. When choosing a tax tool for your business, consider the features, benefits, pricing, customer support, terms, and compatibility with your existing systems. Ensure the solution is also up to date with the latest tax regulations and security measures to safeguard sensitive financial information.

Dividend tax

If you are a company shareholder, then you can pay yourself dividends on top of your annual salary. Dividends are tax-free up to £2,000, any more than this and you will have to pay dividend tax which is determined by your income tax band. The basic rate is 7.5% then goes up to the higher rate of 32.5% and finally, it is 38.1% for those who pay additional-rate tax. However, if your only income is from dividends then you can use up your £12,570 personal allowance. This plus your dividends means you can earn up to £14,570 before having to pay any tax.

Income tax

Income tax is only payable by individuals, businesses themselves do not pay income tax. However, if you give yourself a salary that is over the personal allowance (£12,570) then you will have to pay income tax on this. The amount of tax you pay depends on your tax band which takes into account your wage, dividends savings interest and capital gains. Income tax is 20% basic, 40% higher and 45% additional rate.