United States, 4th Sep 2024 – If you own a business or want to incorporate a UK limited company, there are tax obligations that every business owner should familiarise themselves with. Business owners should understand the various rates, thresholds, and allowances put in place to stay compliant. The business tax law applies to people who are running a business and those who are closing or selling a business. UK tax is administered by HMRC and applies to small and large businesses regardless of their legal structure or activities.
Here is a guide on what businesses need to know about taxes to remain compliant with the UK government and maintain financial stability.
Corporation Tax
UK limited companies and foreign entities with offices in the UK are obligated to pay Corporation Tax. UK resident companies pay Corporation Tax on their worldwide profits while foreign companies pay only on profits from their UK activities. Apart from the company’s profits, this tax is calculated based on trading profits, capital gains from the disposal of assets, and investment income.
The prevailing (2023-2024) Corporation Tax rate stands at 25%, rising from 19% last year. Not all businesses will pay at this level. Companies that made more than £250,000 in profit this tax year will have to pay the full main rate of 25%, however, if your business made a profit of less than £50,000, you will have to pay the ‘small profits rate’ which is at 19%.
Your company may be eligible for marginal relief if it earned a profit between those two limits.
To fulfil their legal obligations, business owners must diligently submit their Corporation Tax UK return to HM Revenue and Customs (HMRC) within nine months from the conclusion of their accounting period. This timely filing is paramount to avoid penalties and maintain compliance.
Pay As You Earn (PAYE)
PAYE is an income tax and National Insurance which is collected directly from employees’ wages or pensions by HMRC.
It is the employer’s responsibility to deduct the appropriate tax and National Insurance amounts from employees’ paychecks and submit them to HMRC.
The amount of tax deducted from employees’ paychecks depends on the kind of work they do and how much they earn.
Employees who earn between up to £37,700 annually will be charged at the basic rate of tax, which is 20%, and anything from £37,701 to £125,140 is charged at the higher rate of 40%. Income over £125,140 is taxed at 45%, known as the additional rate.
Income Tax
Income tax in the UK is a tax you pay on your income, which includes earnings from employment, profits from self-employment, pensions, rental income, and some state benefits.
You do not pay tax on the first £1,000 of income from self-employment (trading allowance), the first £1,000 of income from the property you rent (property allowance), income from tax-exempt accounts like ISAs, and dividends within your dividend allowance.
The income tax rates for the 2024/25 tax year are:
· Basic Rate: 20% on income between £12,571 and £50,270
· Higher Rate: 40% on income between £50,271 and £125,140
· Additional Rate: 45% on income over £125,14023
Income tax is usually deducted automatically from your wages, pensions, or savings. Self-employed individuals pay their income tax through the Self Assessment system annually.
Personal Allowance is the amount of income you do not have to pay tax on. Most people in the UK have a Personal Allowance of £12,570. If you claim certain allowances like the Marriage Allowance or Blind Person’s Allowance, the allowance may be higher and reduces if your income exceeds £100,000
Value Added Tax (VAT)
All businesses in the UK are obligated to register for VAT if they meet a threshold of £90,000. This changed on 1st April 2024 and represents a £5,000 rise over the previous threshold of £85,000.
If your business’ VAT taxable turnover for the last 12 months is more than £90,000 (the VAT threshold), you are legally required to register for VAT.
Businesses will also need to register for a VAT number if they expect their turnover to go over £90,000 in the next 30 days.
You will also need a VAT number if you only sell goods or services that are exempt from VAT but you buy goods for more than £90,000 from EU VAT-registered suppliers to use in your business.
You can also apply for a VAT number even if your turnover is less than £90,000 through voluntary registration.
A business may also be forced to register for VAT if it takes over an existing business that is VAT-registered.
The kind of products or services you offer determines what constitutes the VAT rate you need to charge. the VAT rates are as follows:
Standard rate: 20%. This rate applies to most goods and services.
Reduced rate: 5%. It applies to specific items such as children’s car seats and home energy.
Zero rate: 0%. Certain goods and services fall under this category, including most food and children’s clothes.
National Insurance Contribution (NIC)
National Insurance contributions (NICs) in the UK are payments made by employees, employers, and the self-employed to fund various state benefits, including the State Pension and the National Health Service (NHS).
There are different classes of National Insurance, depending on your employment status and earnings such as:
· Class 1: Paid by employees and employers.
· Class 2: Paid by self-employed individuals with profits above a certain threshold.
· Class 3: Voluntary contributions to fill gaps in your National Insurance record.
· Class 4: Paid by self-employed individuals based on their profits
Employees pay 8% on earnings between £242 and £967 per week, and 2% on earnings above £967 per week.
Self-employed pay contributions if profits are £6,725 or more, and Class 4 contributions on profits above £12,570.
Employees stop paying Class 1 NICs when they reach the State Pension age while self-employed individuals stop paying Class 4 NICs from the start of the tax year after they reach State Pension age.
NICs help fund various benefits, including state pensions, the National Health Service (NHS), and other benefits such as maternity allowance, unemployment benefits, and more.
Business rates
Business rates in the UK are a tax on non-domestic properties, such as shops, offices, pubs, warehouses, and factories. Business rates are similar to council tax but for commercial properties.
Businesses are calculated through rateable value and multiplier.
Rateable value is an estimate of the open market rental value of your property as of a specific date while multiplier is a figure set by the government, which is multiplied by the rateable value to calculate your business rates bill.
You may be eligible for various reliefs to reduce your business rates bill such as:
· Small Business Rate Relief: For properties with a rateable value below a certain threshold.
· Rural Rate Relief: For businesses in rural areas.
· Charitable Rate Relief: For registered charities
As a business owner, it is important to understand all of these taxes to remain compliant and financially stable. Before UK limited company formation, business owners must be aware of how to operate within the legal framework.
If you need help to manage your taxes, BusinAssist offers comprehensive solutions for businesses. Our experienced team navigates through complex tax regulations, ensuring timely submission of Corporation Tax returns and VAT registration.
For more information, contact them at info@businassist.com.
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