An Introduction to Tax and National Insurance for Business
From sole traders to large companies, get the lowdown on your obligations here
As a business owner, the complex web of tax and National Insurance obligations that apply to you can be extremely daunting, and it is difficult to know where to begin. Luckily, you will have this article to help you – below, you will find a comprehensive run-down of the taxes, schemes and reliefs which are likely to affect you and your business
Which taxes affect my business?
Every business is different. If you are a small sole trader, your tax obligations are likely to be fairly simple, limited to just income tax and NI, but larger businesses will have more complex obligations. Broadly, the taxes you are likely to come across include:
- Income tax. Both employees and self-employed people pay income tax, as long as income exceeds £10,000 (in the 2014/15 tax year). If you are an employer, you will be responsible for deducting income tax from your employees’ wages and reporting to HMRC.
- National Insurance. Again, employers are responsible for organising NI contributions on behalf of employees. For the self-employed, special rates apply.
- Value Added Tax (VAT). VAT is payable on goods and services which qualify for it, and VAT-registered businesses may reclaim it.
- Capital Gains Tax (CGT). This is a tax on the profit gained from successful investments.
- Corporation tax. Limited companies pay corporation tax.
- Stamp Duty Land Tax (SDLT). This is a tax on sales of property, shares and land.
How do I work out whether I am self-employed?
Self-employed people comply with different tax rules than employees, so it is important you know which category you fall into. Essentially, you are self-employed if you are ‘your own boss’, although this is an oversimplification. It depends in large part on your company structure:
- Sole trader or partnership. If you are a one-person business or operate in a partnership structure, you are probably self-employed, although this is not always the case. If you regularly carry out work for just one client in an employee-style relationship, you might be classed as a personal services company, for which special tax rules apply. HMRC recommends you ask yourself these questions to work out whether you are self-employed – if you answer ‘yes’ to all of them, you probably are:
- Can I hire someone to do my work or engage helpers at my own expense?
- Am I risking my own money in the course of business?
- Do I provide my own equipment to do my job?
- Do I regularly carry out work for a number of different people?
- Do I agree on a fixed price for jobs?
- Can I decide where and when to do work?
- When I make a mistake, do I have to correct sub-par work in my own time and at my own expense?
- Limited company. Even if you are the founder of a limited company, you count as an employee of the company in the eyes of HMRC. This means you must pay yourself a salary and have the company deduct income tax and NI on a pay-as-you earn basis.