Owning your own business means taking care of your own taxes. But with the labyrinth of tax codes and relief schemes, it can be easy to be in the entirely wrong tax code without even knowing it. 

If that happens, it can lead to a few problems down the line. You might end up underpaying, or overpaying, on your taxes which could lead to a tax investigation from HMRC. 

If you’ve paid too much, you could get reimbursed. If you pay too little, there could be penalties. Either way, it’ll lead to more work and confusing tax jargon. 

In an effort to prevent that, let’s talk about tax codes and help you figure out what you should be paying.

Specifically, we’ll be talking about:

  • Corporation tax
  • VAT (Value Added Tax)
  • Business rates
  • Dividend tax
  • Income tax
  • National insurance
  • Capital gains tax
  • COVID tax relief schemes

Corporation tax

If your business is a limited company, you’ll have to pay corporation tax on all “taxable profits”. Taxable profits is basically your businesses total income after expenses are deducted. 

Corporation tax rate is 19% and applies to:

  • Limited companies
  • A foreign company with a branch in the UK
  • unincorporated associations – any person-based group like a sports club or voluntary group

If any of these apply to you, you’ll have to register for corporation tax, keep accounting records and do a company tax return. 

Even if you have no profits, you still have to declare it. 

VAT (Value Added Tax)

Value Added Tax is added to goods and services that are sold in the UK. For most things it’s 20%, but for some essentials it’s reduced to 5%, like car seats and other childcare necessities. 

VAT applies to any size business, sole trader, or limited company, but you’ll only have to register for VAT if your annual turnover is £85,000 or more. 

To help relieve some of the issues caused by COVID-19, the government has introduced a temporary lower tax rate of 5% on supplies related to hospitality, hotels, and tourism.

The new rate will last until 30 September 2021, and will then be replaced by a 12.5% rate until 31 March 2022.

Business rates

Business rates, often called “non-domestic rate”, are a tax you’ll have to pay if your business uses an office or a workspace. 

The rate is set by local councils, so the amount you pay will depend on the size of your business and where you are in the UK:

You’ll be sent a business rate bill by your local council, but you can check the links above to get an estimate. 

Dividend tax

If you run a limited company you have the option to pay yourself dividends from your annual takings. 

The tax rate for dividends depends on your income tax rate. 

  • If you pay basic income tax, you’ll have to pay 7.5% dividend tax.
  • If you pay higher income tax, you’ll have to pay 32.5% dividend tax.
  • If you pay an additional tax rate, you’ll have to pay 38.1% dividend tax. 

You can pay yourself up to £2,000 tax free in dividends. Any more and you’ll have to pay dividend tax.

Income tax

If you’re self-employed and pay yourself a salary, you’ll have to pay income tax on that salary. 

The amount will change depending on how much you pay yourself. Like this:

  • Personal allowance – anything you earn up to £12,750 is tax free
  • Basic rate – anything you earn from £12,750 – £50,270 will be taxed at 20%
  • Higher rate – anything you earn from £50,270 – £150,000 will be taxed at 40%
  • Additional rate – anything you earn over £150,000 will be taxed at 45%

Income tax rates are different if you live in Scotland.

If you run a limited company, you won’t need to do anything. Income tax will be automatically deducted from your salary. Otherwise, you’ll need to complete a self-assessment tax return

National insurance

If you’re self-employed you’ll have to pay national insurance in one of two classes. It will depend on your annual profits. 

Class 2

For profits over £6915 per year, you’ll have to pay £3.05 per week.

Class 4 

For profits over £9,569 per year, you’ll have to pay:

  • 9% on profits between £9,569 – £50,270
  • 2% on profits over £50,270

If you run a limited company, and you pay yourself a salary, you’ll have to pay class one national insurance. It will be automatically paid through your PAYE payroll.  Otherwise, you’ll need to complete a self-assessment tax return

Capital gains tax

Capital Gains Tax is a tax on profits you make when selling something for more than you got it. You’re only taxed on the profit from the sale, not the whole amount.

For example, if you buy something for £20,000, then sell it for £30,000, only £10,000 will count as profits. So you only need to declare the £10,000 as taxable profits.

You only have to pay capital gains tax if your capital gains profits are above £12,300, or £6,150 for trusts. 

Even if you don’t go over the taxable limit, you still need to report capital gains to HMRC.

If you’re self-employed, you’ll pay capital gains tax as part of your self-assessment tax return

Keep track of your finances with Countingup

Whether you’re a sole trader or running your own business, The best way to prepare for taxes is by making a habit of keeping your financial records organised on a regular basis. 

The Countingup app makes it easy. 

It’s a two in one business current account and accounting software that automates the time-consuming aspects of bookkeeping for self-employed people across the UK, meaning you’ll be well prepared for any tax code you find yourself in. 

Find out more here and sign up for free today.