What taxes does a company have to pay on its trading activities?

Originally written by Joanne McLaughlin about Small Business

UK businesses and self-employed people have a number of obligations in relation to the taxes they may have to pay to HMRC.

Which of these obligations apply to you can be overwhelming, as the taxes that apply depending on your circumstances will vary. This can be especially worrying if you are just getting into business. This article will provide you with an overview of the main business taxes and the circumstances under which you will have to pay them.

Corporation tax

All UK limited companies are subject to corporation tax on profits. The company’s bottom line is largely calculated by subtracting eligible business expenses from your sales. Note that there are certain corporate tax reductions that are also deductible.

Corporate income tax returns must be filed no later than twelve months after the end of your accounting period, but the tax must be paid within nine months and one day of the end of the accounting period.

The current UK corporate tax rate is 19 percent, although it has been confirmed that it will increase to 25 percent effective April 1, 2023.

Income tax

If you run your business as a sole trader or in a partnership, you have to file income tax returns and pay tax on your profits. Filling out and filing tax returns is generally referred to as “self-assessment”.

Income tax gains are also calculated by deducting expenses and relief from sales.

Income tax rates vary based on how much you earn. Almost everyone in the UK is given a tax-free amount of £ 12,570 known as the Personal Allowance. In addition, income in excess of the exemption is taxed differently depending on how much you earn. Note that if your income exceeds £ 125,140 in any tax year, you will no longer receive a personal allowance.

You must file your online tax returns by midnight on January 31st after the end of the tax year. The tax must also be paid on this day. If you would like to submit a paper return, you can still do so, but with a shorter filing deadline of October 31 after the end of the tax year.

If you are self-employed and earn up to £ 1,000 you don’t need to tell HMRC.

Note that self-employed people also pay social security from their income. The amount of the social security contributions to be paid depends on the profit.

Value Added Tax (VAT)

Value-added tax is effectively a sales tax that businesses impose on “taxable supplies,” such as the sale of goods and services, the rental of goods, and commissions.

There are three sales tax rates, the standard rate, which is charged on most items and is 20 percent, the reduced rate (5 percent), and the zero rate (0 percent).

All you need to do is register and charge VAT if your business has “taxable sales” in excess of £ 85,000. Taxable turnover is the sum of all products sold that are not exempt from VAT. Note here that VAT-exempt items are different from those that are classified as zero.

VAT is usually paid to HMRC quarterly, one month and seven days after the end of the quarter.

VAT returns are usually filed with HMRC every quarter. However, if your taxable sales are expected to be £ 1.35m or less over the next 12 months, you can join the annual accounting system which means you only need to file one annual tax return.

PAYE and social security contributions

If a company has employees, it must operate PAYE as part of its payroll. PAYE is an HMRC system for collecting income tax and social security from employees. When making payments to employees, you must deduct taxes and social security from the payment and report the payments and deductions to HMRC on or before payday. The collected tax is usually paid monthly to HMRC.

In addition to the social security contributions paid directly from an employee’s salary, you are also required to pay employer’s social security contributions. Both employee and employer NICs are calculated based on income and social security category. You can find details of these rates at www.gov.uk.

If you pay yourself a salary from a company operated by a limited liability company, that is also subject to PAYE, although it might be more tax efficient to pay yourself off in the form of a corporate dividend. I recommend that you contact your advisor about this.

Joanne McLaughlin is a corporate tax manager in the tax department at Hillier Hopkins.

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What taxes does a company have to pay on its trading activities?

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