The Start Up’s Guide to Income Tax & NI

Running a small business is often one of the most exciting life decisions a person can make. That move to take control away from your boss or company and give it to yourself, in a business sphere that you are passionate about, is one that thousands of people take on every year. The government purse is built on a strong and organized taxation system and when it falters or tax receipts are disappointing – as has been reported in the FT – it restricts public spending and affects us all.

Therefore, we all have a legal obligation to pay our tax properly, whether we’re setting up as a ‘one man band’ or as an SME with several employees. However, there are a few important steps to take – not least preparing your tax returns properly. It’s a dull but necessary topic and one which catches businesses out every year.

Sole traders

For a small or one-person business, taxation is fairly easy as they don’t pay corporation tax. With no employees it’s a simple case of taxing your own profit once it goes above your personal allowance of £11,000 for 2016/17, raising to £11,500 in April 2017. If you earn less than this you won’t have to pay any income tax, and if you are married or in a civil partnership you might be able to transfer part of your tax allowance which can save up to £220 – for more information on this click here.

Taxation becomes more complex if you’re working elsewhere as an employee as you might start paying tax on a lower income, although in that case you may already be paying income tax for an employer via PAYE tax. As a start-up there’s a high chance that you might need employees yourself at some point, so you’ll need to know how to deduct tax and National Insurance from their pay, which will then be passed to HMRC.

Corporation tax

Limited companies pay corporation tax with no threshold, so any profit must be taxed. It’s a simple flat rate of 20% (with the exception of ‘ring fence companies’) for both small profits rate (profits under £300,000) and main rate (above £300,000.) It’s payable nine months and one day after the accounting period/financial year, which is usually January 1.

National insurance

While income tax pays for public services such as the NHS and investment in the transport infrastructure, your National Insurance contributions pay for benefits that you may earn at some point in life such as the state pension or maternity leave.

If you’re self-employed you’ll pay two types of national insurance. Class 2 is £2.80 a week if your profits are £5,965. Class 4 NI is more complex as you pay two different percentages on your profits: 9% on profits between £8,060 and £43,000 and 2% on anything over that. Employees pay Class 1 National Insurance, while Class 3 is voluntary (to fill any gaps in their national insurance record).

Lessons
No matter what tax you pay, your business simply will not work if you don’t practise effective book-keeping, and you also won’t be remaining within the law. These must be maintained for at least six years, even if the business folds. Using robust accounting software will make this job much easier and give you piece of mind.