As a taxpayer we all hate paying taxes don’t we? But understanding our tax system, HMRCs collection processes, what taxes are due for what and when is a minefield! We’d always recommend having an accountant to help navigate this with you; one small error could cost you dearly as far as HMRC are concerned.
There are several different types of tax, all of which depend on whether you may be a sole trader, partnership or limited company or even a PLC. We have outlined below the main types of tax and relevant thresholds as of 2017/18 and 2018/19.
Tax itself is the main source of the UK governments’ income and we are one of the heaviest taxed countries in the world with tax on everything we buy, everything we earn and even everything we smoke or drink nowadays.
Income Tax – The most common form of tax
All individuals get an allowance per year, which can be earned without having to pay any form of tax on it. Once you are over this threshold then tax applies to your earnings whether you are employed or self-employed in any form. The personal allowance on your earnings has changed over the years from as little as being able to earn £2,605 back in 1988/89 to £12,500 2019/20.
When you’re self-employed you pay Income Tax on your profits – not your total income. So by deducting your business expenses from your total income you can see where you stand.
PAYE – As an Employer
The Pay As You Earn (PAYE) system is a method of paying Income Tax and National Insurance contributions, when employed by a company directly. Your employer deducts tax and National Insurance contributions from your wages or occupational pension before paying you your wages or pension.
Taxation for Employers
If your company is going to employ individuals, one of the tax payments of which you should be aware of is PAYE. PAYE requires a company which employs individuals to deduct Income Tax under the ‘pay as you earn’ system from all payments of salary made to those individuals.
National Insurance Contributions (“NICs”) are also payable both by the employee and the employer. The employee’s contribution is deducted, by the employer, from their salary.
The employer’s contribution is an additional cost to the business. Currently an employee’s NIC is charged at a rate of 12% or 2% depending on level of earnings, and employers’ NICs are charged at the rate of 13.8% of the gross salary paid to the employee.
As soon as your company employs any individuals it should inform HMRC and establish a payroll system (this can be outsourced to a payroll services provider).
National Insurance (NI)
National Insurance is a tax on earnings and self-employed profits. Your National Insurance contributions are paid into a fund, from which some state benefits are paid. This includes the state pension, statutory sick pay, maternity leave, or entitlement to additional unemployment benefits. Anyone 16 years old and above are mandated to pay National Insurance provided the employee earns more than £162 a week or the individual is self-employed and makes a profit of £6,205 or more annually
VAT (Value Added Tax)
VAT was introduced in 1973 and it’s the third largest source of our governments income. VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the EU (ignoring Brexit for a moment there!) Since 2011 the default rate of VAT stands at 20%. Some goods and services are subject to VAT at a reduced rate of 5% (for example domestic fuel) or in some instances 0% (such as most food and children’s clothing). The VAT threshold has been frozen at 20% through to 2019/20 – Its estimated that this will raise approximately £26 million p/year for HMRC in collected taxes.
VAT is something you will need to cater for, once you hit what is called the VAT threshold – It’s always best, again, to have an accountant involved as you’ll need to understand your forecasted income to ensure to register for VAT in a timely fashion. All businesses which have an annual turnover of more than the current VAT threshold – currently £85,000 – must register for VAT and complete a quarterly VAT return. In some instances HMRC may request monthly VAT returns if you are in arrears and if it helps simplify a collection process on a business.
How VAT works
Once your business is VAT-registered you must do three things:
- You must charge VAT – currently 20% – on the goods or services you sell to customers and other businesses,
- you must pay VAT on the goods and services you buy from other businesses,
- and you must file a VAT return every quarter to HMRC.
The idea is that the VAT you charge and the VAT you pay roughly balances – any difference is sorted out via your VAT tax return, with you either paying HMRC the amount you owe them or receiving a refund for the amount they owe you. Its sounds simple but we all know errors can occur and delays in HMRC refunding VAT can cause issues with a businesses cash flow, causing other debts to escalate. Our team will happily chat through options, should you be faced with any debt issues with HMRC or be encountering issues on VAT. You can contact us if you wish to discuss matters further.
The VAT threshold may change once a year when the government announces the Budget for the coming year – usually in March or April – so ensure you are always charging the correct amount.
The practicalities of VAT
When adding it on to invoices you should show the VAT amount separately, listing the cost of the goods or services before VAT, the cost of VAT and what rate it was charged at, and the total sum owed.
There are three different rates of VAT that can be charged – standard rate (currently 20%), reduced rate (currently 5%) and zero rate (0%). Some goods and services are also exempt from VAT, such as antiques and education services. You must charge VAT on the full sale price, even if you accept goods in part exchange or barter instead of money.
There are also specific VAT rules that apply to certain trades and industries – the motor trade for example.
You can register to pay VAT online at the Government Gateway website, www.gateway.gov.uk.
Corporation Tax
Simply put it is a tax levied on companies’ profits for UK limited companies. It’s a little like an Income Tax for companies without the benefit of a personal allowance (as described above for Income Tax). If you’re a Limited company, as soon as you make profits you’ll start to pay Corporation Tax, which your accountant will produce via returns.
In the early days the percentage you paid was dependant on how much profit you made, the rate now is 19%. It is also forecast that for 2020/21 Corporation Tax may be reduced to 17%.
Corporation Tax rules revolve around your companies accounting periods, this can either be checked by yourself via HMRCs online services or through your accountant/bookkeeper. Most companies run a 12 month accounting period, inline with statements and annual accounts being produced. Corporation Tax filing deadlines differ than other taxes, normally this is paid prior to filing your company tax returns and the date important to this depends on your own accounting periods. The deadline for paying is 9 months and one day after the end of your accounting period for your previous year.
One of the first things a small business must do when setting up is register for Corporation Tax, which you can do on the .Gov.uk website with HMRC. This needs to be done within three months of starting to trade.
If you would like to discuss any of the above taxes in further detail or you think we can help you with a Time to Pay Arrangement when you owe taxes to HMRC, then do contact us. We are a very friendly approachable team who look forward to helping as many people as we can. Head over to our website – www.taxdebtshelpandadvice.com and start a live chat or call 01704 630908 today.
