Taxation and Business Accounting in the UK: Essential Considerations for Entrepreneurs

Taxation and Business Accounting in the UK

When you decided to start your own accounting freelance business, your friends and family may have said things like, “You’ll pay your own income taxes.” Or, “You’ll be applying for corporate taxes one day.”

But do you know what terms like this mean?

There are several key differences between filing taxes as a sole proprietor, as part of a partnership, or running a accounting limited liability company or limited liability company (LLP). As a result, you will need to understand some of the different taxes that are available to pay the right amount of tax.
In this article, we’ll outline 6 taxes that small business owners should know and why you need to understand them.

1. Income Tax

Single traders pay income tax on their trading profits. You will have to pay tax on any income above the £12,570 personal allowance as long as you do not earn any other income, such as wages from permanent employment.

This is available in 3 prices:

1. 20% on base rate (for income between £12,571 and £50,270)
2. 40% for the top (for income between £50,271 and £150,000)
3. 45% for additional rate (for income over £150,000)
The rate you pay will depend on how much you earn. And there are different tax rates in Scotland.

Income tax filing deadlines are the same as your self-assessment deadlines:

October 31 for paper returns or January 31 for online returns. This will always be for the previous tax year.
Therefore, you have until October 31, 2023 or January 31, 2024 to pay income tax for the tax year 2022/23 (which extends from April 6, 2022 to April 5, 2023). ). If you run a limited liability company, you will pay income tax on any dividends over £2,000 you receive from your business.

The price for this is:
  1. 8.75% for base rate .
  2. 33.75% for the highest rate .
  3. 39.35% for additional rate .

2. National Insurance

As a sole proprietor, you will make a Class 2 and Class 4 National Insurance contribution on your profits in addition to income tax.
These payments are due at the same time as your income tax and self-assessment payments:
October 31 for paper returns and January 31 for online returns.
The amount you pay as an individual entrepreneur depends on your income.

So you will pay:

  1. Nothing for profits below £11,908 .
  2. £3.1 per week (Grade 2) .
  3. 9.73% for profits between £11,909 and £50,270 (Category 4) .
  4. 2.73% for profits of £50,270 or more (Category 4).

If you run a limited liability company and pay your own wages, you will need to deduct your Class 1 employee contributions from your paycheck and pay HMRC. Your employer will also be required to pay your Class 1 employer contributions at the rate of 15.05%, unless this is covered by Employment Insurance.

Current Type 1 employee contribution rates are as follows:

• 13.25% with salary from £1,048 to £4,189 per month
• 3.25% on any salary over £4,189 per month

3. Pay by invoice

The deposit is a contribution to your tax bill for the following year.

Usually you will pay this in 2 installments:

• The first payment will be due at the same time as your self-assessment, income tax, and social security payments:
October 31 for paper returns or January 31 for online forms
• The second payment is due on July 31
Each payment will be half of your previous year’s tax bill. You will have to make these 2 payments unless:

• Your final bill is less than £1000
• You have paid more than 80% of the tax you owe through your tax code or by deducting interest on your savings
You will have to pay the balance if you still owe tax on January 31 of the next tax year. If you know your tax bill will be lower than last year, you can request a reduction from HMRC by contacting us online or by phone.

4. Value Added Tax (VAT)

Whether you are a sole proprietor, limited liability company, partnership or LLP, you will need to register and pay VAT if you earn more than £85,000 a year. Businesses subject to VAT must charge their customers VAT on their services, which can then be reimbursed to the cost of doing business.

You can sign up if you make less than that, which means you can claim a VAT refund on any purchases you make, such as equipment and stationery. But you will need to submit a VAT return to HMRC if you do. VAT is currently set at 20% for the regular rate, 5% for the reduction and 0% for some exceptions. You must submit a VAT return every 3 months to HMRC, even if you have nothing to claim for that quarter.

You must also submit your returns using Digital Tax Preparation (MTD) and keep a digital record of them using VAT compliant software.

5. Corporate Tax

If you own a limited liability accounting company, you will have to pay corporation tax on the profits you make. There’s no equivalent personal allowance in this case, so as soon as you make a profit, you’ll start paying corporate taxes (unless you’ve already made a loss).

So how much tax will you have to pay? The fixed corporate tax rate is currently 19%. It is payable 9 months and 1 day after the end of your Business Accounting year. If your year ends on March 31, you will have to file your business taxes by January 1. You will also need to complete form CT600 (Corporate Tax Return) no later than 12 months after your first fiscal year.

6. Pro rate

Do you run your business from an office or other accounting property? In this case, you may have to pay professional rates. This is similar to a council tax, but only for commercial properties. Some locations are exempt from paying the business tax rate, such as a farm, while others may qualify for a reduced business tax rate. Your local government will calculate your business rate and send you an invoice. These usually come in February or March and must be paid by April 1 of the following year. The price is determined based on the assessed value of your property. This is the estimated value it would have if you sold it.

If you run your business from home, you usually won’t pay business rates. You will only have to pay council tax and part of this can be considered an expense. However, there are exceptions.

You cannot claim compensation if:

1.Must hire employees to work from your home.
2.Sell goods or services to customers from your home.

3.Adjust your home to be able to work there.
4.Your home is part commercial and part domestic.

We give entrepreneurs a lot of tax advice, so we’ve listed 9 key areas below where they should seek tax advice if they’re not ready. We regularly come across contractors unaware of some or all of the following areas that can save tens of thousands of pounds in tax.

As a general rule, every entrepreneur should have a tax strategy in place to help them achieve their personal and business goals in the most tax-efficient way possible. This strategy needs regular review, as changes in the law, their situation and the economy can all render the strategy obsolete.


1. Check now if you can claim R&D tax relief

The R&D tax break is the most generous tax relief available to many companies. They are widely available to any business that pays technical experts to solve technical problems and can result in tax savings of up to £25,000 for every £100,000 spent on R&D. However, statistics show that less than 20% of all companies are eligible to apply.

2. Pay reduced corporate tax rates on patent profits

The Patent Box is the name of the law introduced by the UK government to encourage the preservation of intellectual property and the valuable work and goals that come with it in the UK. It offers companies involved in the development of patentable technologies at a tax rate of only 10%, roughly half of the normal tax rate. Worldwide profits generated by UK companies from the sale of products incorporating patented elements and other income arising from patents may be subject to reduced corporate tax rates This. We see more and more companies claiming this accounting tax relief and wonder if they have patented technology that could also have benefits beyond taxes.

3. Effectively rewarding and retaining key personnel

Recruiting, retaining and motivating employees is critical to the long-term success and growth of any business. There are many tax-efficient ways to achieve this, using stock awards, stock options, and other tax-efficient benefits. We see many companies using Enterprise Management Incentives (EMI) stock programs in this regard. These HMRC-approved stock options programs offer tax benefits to independent trading companies. They give employees an option or right to buy shares in the future, at their present value. There is no income tax or NIC on the grant or exercise of the option, and the shares will be subject to CGT upon sale, potentially providing option holders with a tax rate of just 10%.

4. Protect your real estate assets

Many companies own the premises from which they do business, and many have investment assets that are not related to the trade. Business owners may want to separate real estate assets from commercials for a number of reasons. For example, to make a accounting business more attractive to potential buyers, to secure assets (out of concerns about the future of the business), or to transfer ownership to a salary scheme. retirement.

5. Minimize tax on real estate and other capital projects

Accounting Tax relief on property, plant, machinery and equipment is achieved through a depreciation deduction system rather than a tax rebate on depreciation charges in the company’s accounts. The amortization system is complex, and we see companies claim depreciation because it is not possible to identify all expenses that are eligible for a tax refund. For example, this occurs when used assets are acquired and no allocation is made at the settlement price between the different asset classes contained in the asset. Many traditional accountants cannot perform such a detailed exercise – an amortization specialist should be employed. Very significant tax savings can be obtained from such consideration.

6. Don’t turn your back on pensions

While the commonly planned new restrictions on pension tax relief have yet to materialize, important reforms are still being worked on and the current generous tax breaks should be used while they are still in place. effect. Many people still think pensions unduly restrict their access to money due to the annuity system, but recent legal changes mean pensioners can access their money much more easily. than they imagined.

7. Make sure you have an up-to-date will

The number of wealthy entrepreneurs we meet with no will or without verification in a while is astounding. Focusing solely on your business and neglecting your personal affairs can mean that a significant percentage of your life’s work could be lost to inheritance taxes. Wills, combined with tax planning using a trust, can help ensure that entrepreneurs transfer their assets in a tax-efficient manner and give them some control over the assets. theirs even after death.

8. Make sure you understand how trusts can help you effectively transfer taxes on your assets

As for wills, many wealthy entrepreneurs have never heard of trusts or have a misconception about them. Trusts can be used to transfer beneficial ownership of assets in a tax-efficient manner while maintaining control over the recipients of those assets and how they are used. A trust can also be created for one or more specific people, allowing certain family members to be excluded. They can be especially useful in allowing family members to accounting participate in the profits of a business while allowing the entrepreneur to retain overall control. Trusts can offer a number of benefits, including flexibility over who can benefit from your assets, control over the assets for a longer period of time, tax benefits, the ability to protect against expenses. nursing home expenses, accounting beneficiaries of profligate spending, bankruptcy and/or divorce.

9. Plan ahead for a business sale

Selling a business has many tax consequences, including some of the accounting topics mentioned above. The tax system is purposefully designed to help entrepreneurs grow and sell their businesses in a tax efficient manner. For example, a trading company can be sold with a CGT that pays all profits generated at a rate of only 10% if there is an Entrepreneur Grant (ER). However, you need to plan ahead to take advantage of these tax benefits. Issues that need to be considered in advance to enable proper tax planning include locking down key personnel, ensuring RE availability, and tax-efficient investment planning for any sales proceeds. receive, possibly using a pension. Inheritance Tax (IHT) planning may also become relevant at this stage, and steps can often be taken prior to the sale to minimize any potential IHT debt.

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