An Introduction to Tax and National Insurance for Business

From sole traders to large companies, get the lowdown on your obligations here

An Introduction to Tax and National Insurance for Business

What do I need to know about my employees’ income tax?

  • You must deduct income tax and NICs from employees’ pay yourself. Your payroll software should be able to do this automatically. This system is known as Pay As You Earn, or PAYE.
  • You must submit PAYE reports to HMRC on or before each payday. The new real-time information (RTI) rules require you to submit information to HMRC at the same time you pay your employees, rather than monthly or quarterly, as was the case previously. More information can be found <a”href=http://www.hmrc.gov.uk/payerti/ target=”_blank”>here.
  • Most employee benefits are taxable. There are some exceptions:
    • Approved employee shareholding schemes
    • Payments into pension schemes approved by the HMRC
    • Loans of up to £10,000 carrying a low rate of interest
    • Childcare at the workplace
    • £55 per week’s worth of approved childcare vouchers
    • Provision of office equipment and food at the workplace
    • Other benefits
  • You can use share schemes to reduce employees’ tax bills. HMRC-approved shareholding schemes can be used to incentivise employees to remain with your company by purchasing a stake in it, reducing their tax bill as a result. Share schemes include:

How much National Insurance do I pay?

The amount of National Insurance (NI) you pay depends on whether you are an employee or self-employed.

  • Self-employed:Generally, your tax obligations are likely to be less overall than as a fully paid-up employee, in recognition of the reduced benefits you receive. You will pay two kinds of NI contributions:
    • Class 2 contributions: set at a flat rate of £2.75 per week (unless you earn less than £5,885 per year). They are due at the same dates as your self-assessment tax bill (31 January and 31 July).
    • Class 4 contributions: These are calculated at 9% of your annual profits between £7,956 and £41,865 and 2% on any profit over that amount.
  • Employees: Employees pay Class 1 contributions, which are set at the following rates, based on weekly earnings:
  • Below £153: 0%; £153.01-£805: 12% and additional earnings over £805: 2%

 

Employers: Employers pay national insurance contributions on employees’ wages, normally set at a basic rate of around 12%. You can find out more information here.

 

What are the rules around VAT?

  • VAT is payable on all sales of goods and services. If you are VAT-registered (see below), you will be able to recover VAT on your purchases. Most goods and services qualify for VAT, but there are some exceptions. The different rates of VAT are:
    • The standard rate of 20%. This applies to the vast majority of goods and services sold in the UK.
    • The reduced rate of 5%. Some purchases, such as domestic heating and children’s car seats, qualify for a reduced rate. See the full list here.
    • The zero rate of 0%. This is not the same as exempt purchases – VAT is still charged but at a rate of 0%. This means you can sometimes claim back VAT on purchases related to those goods or services. Zero rated purchases include food, children’s clothes and newly-built houses.
    • Exempt supplies. These include some types of education and training, health-related services and insurance.
  • You can claim back VAT as a VAT-registered business. You must register for VAT if your annual revenues exceed the current VAT registration threshold of £81,000. You can deregister again if your turnover falls back below £79,000. All businesses must pay VAT, but only VAT-registered businesses can reclaim it.
  • There are other ways to account for VAT targeted at small and medium-sized businesses. HMRC operates a number of alternative schemes designed to make it easier for small and medium-sized businesses to account for VAT, including:
    • Flat Rate scheme. You can use this scheme if your VATable turnover in the next year will be no more than £150,000 and your total turnover will be no more than £191,500 (you must leave the scheme if your turnover exceeds £230,000). You don’t keep a record of the VAT you charge on every sale or pay on every purchase – VAT is calculated as a percentage of total VAT-inclusive turnover.
    • Cash Accounting scheme. Normally, you have to pay HMRC the VAT you charged on your sales as a business whether or not a customer has paid. Under cash accounting, however, you only pay VAT when a customer has actually paid you. You can use the scheme if your turnover over the next year will be no more than £1.35m, and you must leave the scheme if your turnover exceeds £1.6m.
    • Annual Accounting scheme. This is a similar scheme to cash accounting, except VAT returns are submitted annually, rather than on a quarterly basis. The turnover thresholds are the same as for the cash accounting scheme.
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