How Do I Prepare My Taxes For My Small Business
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How do I prepare my taxes for my small business? This article looks at the reasons why you need to file tax returns and who is required to file it.
The world of UK tax is challenging and confusing. How much tax you owe and when it's due catch many small businesses out annually, so keep reading this article if you find yourself dealing with a self-assessment tax return for the first time.
Why do I have to file a tax return?
Why you need to pay a tax return is a mystery to many people, choosing to simply accept the reality instead of questioning it.
The UK Government relies on sole traders, small businesses and limited companies to pay their tax returns on time during the financial year.
A tax year spans the 6th of April to the 5th of April of the following year, and your income and business expenses must be documented on a self-assessment tax return.
When you are employed under a full-time contract, your employer will organise all employees' wages and enrol in PAYE (Pay As You Earn), meaning your tax is taken from your payslip every month without doing more. Small businesses owners will have to complete their own tax returns.
Your tax contributes to many factors in your society, from roads being repaired to the police being paid. Everyone is responsible for paying taxes of differing amounts for this system to continue working.
You pay your tax return to HMRC annually, and you can expect this to become more complicated as your business grows.
Who has to file a tax return?
Small business owners, self-employed and sole traders are liable for filing a tax return online, but there is a threshold to be passed.
If you have earned over Â£1000 in the last 12 months or financial year, you must register and complete a tax return. Landlords who rent properties or individuals that make money via investments may also require a self-assessment tax return.
It is unlikely you will have to pay income tax on this figure, as personal allowance entitles you to a certain amount of income tax-free money.
As of 2021, the personal allowance amount was Â£12,570 for small businesses. Self-employed are charged on their trading profits and not annual salary.
What are the different types of tax?
Tax requirements differ from one business premises to another. Your profits, business income, and whether you sell goods or services will all make a difference in how much tax and what type of tax you pay.
Understanding which tax types you are eligible for and how to pay for them is confusing, which is why hiring a good accountant is key.
The following taxes are the most common tax types, and understanding how they work and who is eligible can save you much time and money.
This is a direct tax that is paid by any legal entity and corporation in the UK. A limited company and foreign companies registered in the UK may be eligible to pay it, and clubs and other associations.
Limited companies pay corporation tax on all profits, with the current rate being 19%. Business directors who pay dividends to themselves will not need to pay anything for the first Â£2000. Basic-rate taxpayers pay 7.5%, with higher-rate taxpayers paying 32.5%.
When you pay tax of this type, the limited company in question is responsible for calculating their tax payments and paying them on time.
You will not receive a corporation tax bill, so you will benefit from hiring an accountant to calculate taxable income and establish a direct debit.
The filing deadline for corporation tax is 12 months after your accounting period ends, with the payment deadline being nine months after the accounting period.
With some limited companies that are in their first year of business, you may have to submit two tax returns because the accounting reference date will not begin until the last day of the setup month.
Annual accounts cannot cover periods of longer than 12 months, so you should always check beforehand. Paying corporation tax is your legal responsibility and cannot be ignored. You must also file a company tax return whether you have made a loss or don't owe any tax already.
-VAT (Value Added Tax)
Another common small business tax is VAT, but this is applicable to all business types. If you sell services or products and garner over Â£85,000 in profits, you will pay this tax added to the product.
This covers the transaction of the supplier to the buyer to the customer. Smaller businesses can also register to be VAT registered even if they haven't surpassed the threshold, but there is no need to register if you choose not to.
VAT registered businesses must declare how VAT they have paid or charged on their VAT tax return. HMRC (HM Revenue and Customs) can help you reclaim the difference when you have paid more tax than you owe.
As of writing, the standard VAT rate is 20%, with some products and services being exempt (water, sewage and certain goods sold by charity shops).
VAT payments differ depending on if you are part of the Annual Account Scheme or Payments On Account. Accountants can provide guidance with this transition, whether you need to submit just yet or not.
If your business premises where you operate is a non-domestic property, you are required to pay business rates. Offices, warehouses and shops are the typical examples.
If you run a business from home from a home office or somewhere similar, you may also have to pay business rates. When you employ staff that work from your home, renovated your home to run a business from it or sell goods or products to visitors to your home, you will have to pay business rates.
Depending on your local council, your deadline will differ, but you will receive a bill showing the due date. Rates change for businesses operating in Scotland and Northern Ireland.
-PAYE (Pay As You Earn)
Employers who manage any number of employees must complete PAYE forms and ensure their income tax is deducted from monthly salaries. Employers' own wages and other managing directors will be included in these responsibilities.
Class 1, 1A and 1B National Insurance and income tax deductions for employees must be considered, and an accountant can assist in ensuring the correct amount of tax is withdrawn. Payslips or PAYE bills can also include student loan repayments, Construction Industry Scheme deductions and Apprenticeship Levy Payments, along with pension payments.
Whether you are a sole trader, director or partner, you are eligible to pay income tax on all taxable profits.
Directors must be aware of all employment earnings, state benefits, pensions, job benefits, trust incomes and interest on saving incomes, as you may have to pay income tax on some.
Sole traders do not pay income tax on their first Â£1000 earned, as this is your trading allowance. The same goes for rental property income; the first Â£1000 is tax-free.
If you are under the Rent-A-Room scheme, you can earn up to Â£7500 in tax-free income before paying income tax. Some other tax reliefs exist, so ask your accountant for personalised advice.
There are many UK Government benefits you can only be eligible for when you pay National Insurance Contributions (NICs).
Individuals older than 16 must pay NICs whether they are self-employed or making a Â£6515 or greater profit. Class 1 rate National Insurance ranges from 2%-12% depending on your income.
Class 2 and 4 rates cover 2%-9%, with Â£3.05 a week payments. For more information, visit the GOV.UK webpage on National Insurance payments and understanding state pensions.
How to File Your Tax Return
Now you know more about the various tax types, how do you file your tax return? If you have never filed one before, there is no need to panic.
Many small businesses file their self-assessment tax returns annually, and the 31st January deadline can strike fear in many people. Let's look at a step-by-step guide on filing your first tax return.
-Register with HMRC
You can complete your tax return form online under the making tax digital scheme (MTD). Register yourself with HM Revenue and Customs, which should result in you receiving an activation PIN in the post.
Online tax returns have made this process much easier for many people. Small businesses choose to hire chartered accountants as they carry the knowledge of leading accounting systems available for use, alleviating some of the pressure from you.
-Organise Your Expenses
Be sure to organise your financial information best you can, keeping all invoices and receipts together. The sooner you get your business expenses together, the better.
This will give you a clearer idea of where your finances are going and help you project growth for the future of your business.
Your online account allows for greater control than ever before, allowing you to view your business from an outside perspective. VAT returns can be made much easier on accounting software too.
-Learn Your Unique Tax Reference Number
You should also quote your Unique Tax Reference (UTR) on all tax returns when you have received your activation PIN.
This is a figure of ten numbers, different to your National Insurance number. When you are employed or a director of your own private limited company, your P60 will document your salary and taxes.
All your income must be documented and stored correctly, which is why organising your expenses is beyond important.
-Working from Home
Your tax liability may differ when you work from home, meaning you could potentially claim part of the costs on council tax, heating, electricity or even rent.
The rules and liabilities can change whether you are self-employed or a partner in a business, so be sure to divide your costs evenly and be honest.
Whether you have just made this transition or not, it's wise to plan ahead and register for VAT and get a better understanding of your business finances.
-What Else You Can Claim
You can claim tax on other things, whether that's accountancy fees or stationary. Office equipment bought specifically for your job can also count, along with important business-specific insurances.
If you have an accountant, they will inform you on the best path to take and what is viable for your business structure.
Capital allowances may cover your equipment and machinery, and business vehicles. Assets you use for your business can be covered, but always check before assuming.
If you miss the 31 January deadline, you can be fined Â£100 by HMRC for failing to file on time. All late taxes will be charged interest until paid unless there was a legitimate reason for not paying on time.
In that instance, be sure to contact HMRC via phone to discuss further. Otherwise, always submit your tax return on time.
Sole traders do not need to manage their accounts for tax purposes, but you may find it challenging to manage the business financial information without proper preparation.
However, if you are trading through a limited liability partnership, you must prepare accounts for Companies House.
For more assistance, please contact our team today.
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