A Business Owners Guide To Tax

Posted on 9th June 2023

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Managing taxes is an integral part of running a small business. While it may not be the most glamorous aspect of entrepreneurship, understanding your tax obligations can save you a lot of headaches down the line and could even save your business money. In this guide, we’ll demystify the world of small business taxes to help you navigate your responsibilities as a business owner.

1. Understand Your Tax Obligations

One of the key skills needed to run a business is understanding your tax obligations. As a small business owner, you may need to consider several types of taxes, including income tax, corporation tax, value-added tax (VAT), and National Insurance contributions. The type of taxes you’re liable for depends on your business structure: sole traders and partnerships pay income tax, while limited companies pay corporation tax.

2. Register for VAT

If your business’s VAT taxable turnover exceeds the current VAT threshold (£85,000 as of my last update in September 2021), you must register for VAT with HM Revenue and Customs (HMRC). Once registered, you’ll charge VAT on your goods and services and can reclaim VAT on eligible business expenses.

3. Pay National Insurance

National Insurance is a compulsory contribution that funds state benefits. As a small business owner, the type and amount of National Insurance you pay depend on your profits and whether you employ staff. Sole traders pay Class 2 and Class 4 National Insurance, while limited companies pay Class 1 National Insurance on employees’ salaries.

4. Understand Tax Deductions

You can reduce your taxable income by claiming allowable business expenses. These can include office costs, travel costs, staff salaries, stock or raw materials, financial costs like insurance or bank charges, and costs for your business premises. Understanding what you can deduct and keeping accurate records of these expenses can significantly reduce your tax bill.

5. Keep Accurate Records

HMRC requires businesses to keep records of all sales and income, all business expenses, VAT records if the business is VAT registered, and PAYE records if the business employs staff. Accurate record-keeping not only helps you stay compliant but also makes it easier to calculate your tax liability and prepare your tax returns.

6. File Your Tax Returns On Time

Filing your tax returns on time is crucial to avoid penalties. The deadlines depend on your business structure and the tax in question. For example, the deadline for online self-assessment tax returns for sole traders and partnerships is 31 January following the end of the tax year, while corporation tax for limited companies is usually due 9 months and 1 day after the end of the accounting period.

7. Consider Hiring a Professional

Tax laws can be complex and ever-changing. If you’re not confident handling your business taxes, consider hiring an accountant or tax adviser. They can ensure you’re meeting your tax obligations, help you claim all allowable expenses, and provide advice on tax planning.

Understanding taxes is a crucial part of running a successful small business. By understanding your tax obligations, registering for VAT if necessary, paying the correct National Insurance, claiming allowable expenses, keeping accurate records, filing your tax returns on time, and considering professional help, you can manage your business taxes effectively. Remember, the skills needed to run a business are not only about making sales and growing – they also involve meeting your obligations to the taxman!