Before you embark on the long and tough journey that is starting your own business you should do plenty of research regarding all the different aspects that will go into it. You should be researching your competition, building a business plan, analysing your finances, assessing resources etc.
One of the things that can really confuse new business owners is taxes – what taxes do you need to pay? How do you pay your taxes? Whilst being one of the most confusing aspects of running a business, it is also one of the most important because you can bring on some serious penalties for insufficient or late payment. You can even end up in legal trouble so do not underestimate the importance of knowing your stuff.
Here are the five main taxes that you should keep in mind.
VAT (value-added tax)
If you make more than £85,000 in sales throughout the year, then you need to register for VAT and you will need to charge VAT to your customers. Understanding what is a VAT invoice and how to calculate your VAT is crucial for any growing business. Even if you do not reach the above threshold then you should still consider registering anyway as there are some benefits including the option to claim back VAT on your business expenses.
Income tax is paid by individuals so if you are a director or shareholder of a limited company, a sole trader, or a partner then you will have to pay tax on your income.
Corporation tax is what limited companies pay on their profits. Some business owners opt to change from being a sole trader to a limited company because corporation tax can be a much lower rate than income tax, depending on how much you are making.
Not a necessary tax as such, but NI is a payment that you must make to the government. Your national insurance contribution depends on how much you earn, whether you are employed, self-employed and also can change if you are an employer. You can find all the different NI classes on the government website.
If you conduct your business from a separate property such as an office, a shop or a factory, then you will have to pay business rates on this property. This is basically a council tax that applies to businesses, paid to your local authority.
If you are an employer, then you are responsible for your employee’s earnings and taxes so consider getting a payroll scheme.
If all this is too much, then you should definitely consider hiring an accountant to handle all your finances or simply to deal with your taxes at the end of the fiscal year. It will be worth it for your peace of mind and to ensure that you do not get any nasty surprises in the form of a hefty tax bill or a fine for insufficient payment. The amount you spend on a professional may even be counteracted by the money that they save you in the long run!
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