It takes time to get this right but if done correctly your business will be in a great position. Various tasks like dealing with invoices, recording expenses, monitoring outgoings and paying employees can be very time consuming.
The yearly financial performance of your business must be presented in a formal record and in a prescribed format – this includes sales, costs, assets (things like stock or machinery or equipment) and amounts owed. The due date for submitting accounts depends on whether you operate as a sole trader or a limited company. You can choose when your accounting year is to end, but since taxable income for sole traders is calculated on a 6 April to 5 April basis – and accounts are needed to back up the tax return – it makes sense for sole traders (and partnerships) to have an accounting year that runs from 1 April to 31 March. The relevant accounts need to be completed before the following 31 January, to be used when completing your self-assessment tax return due on that date. For limited companies you can more or less choose your accounting year to suit yourself and your business but you still need to complete and file accounts every year with Companies House.
All UK limited companies pay this, and it is currently charged at 19 per cent on any profit generated that isn’t ring-fenced. A corporation tax return must be completed, with tax due for payment to HMRC within nine months and one day of the accounting period.
To calculate your personal income tax on all your income for the year (6 April to 5 April). This form must be completed, filed and any tax paid no later than the 31 January following the previous 5 April tax-year.
A tax-free personal allowance of £11,850 (2018/19) is available to everyone, and approximately the next £32,000 of ‘basic rate’ income above this personal allowance is taxed at 20 per cent. Any income above this falls into the ‘higher rate’ band, and is currently taxed at 40 per cent, which then goes up to 45 per cent for earnings above £150,000. Anyone earning over £100,000 also starts to lose their personal allowance. Additionally, out of employment (salary and wages) income comes national insurance, which is payable at various rates and thresholds. In the case of a limited company, dividend income is taxed at lower rates and there is no national insurance to be paid.
Irrespective of your business structure, you must register for VAT if your annual turnover (sales) is £85,000 or more – registration is optional if turnover is below that. You will charge your customers at the standard 20 per cent rate of VAT, which means that you must add 20 per cent to your sales invoice values and then keep this amount aside from what your customers pay you. You will then be able to reclaim any VAT you have paid on business-related purchases and expenses and you must pay the net amount of the two over to HMRC. VAT returns and payments are due on a quarterly basis.
Income tax and national insurance need to be calculated, deducted from the gross wages and salaries of your staff and paid over to HMRC on their behalf. This is a monthly payment that’s deducted from your employee’s gross salaries, meaning that there’s no cost to your business. National Insurance is deducted at a rate of 12 per cent for employees, although both income tax and NI only kick in once a certain earnings limit is reached. Employer’s national insurance is also charged at a rate of 13.8 per cent on the gross salary, again within certain thresholds – this is not deducted from their salaries and so it represents a real, additional tax cost to your business.
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