Starting up a new business is an exciting fresh start. But people always seem to forget about taxes. We all know that tax is a fact of life whether you are running a business or employed at some point you will pay tax. Business tax is a subject that is not very attractive but is crucial to any business being able to survive.
As a business owner, you may be subject to certain types of tax depending on the activities and thresholds you undertake. For example
-PAYE ( Pay As You Earn) for employees
-National insurance contributions
-VAT (Value Added Tax) can vary depending on the business
-Business rate (linked to your premises)
The most important aspect of keeping on top of these taxes if they apply to your business is planning. Planning to ensure you collect the fees or enough to cover expenses but then ensure you set aside the funds to pay the tax bill.
How much do you need to set aside for taxes for a small business?
Working out how much you need to set aside for business tax can get very complicated. Especially when your business has many other expenses through the tax year. Working in retail means they make their money from sales, but a lot of that money will also go on their suppliers and buy the goods off. If for example you provide a service you derive your profit in a slightly different way but as a business, you still have expenses and taxes that can be planned for.
Luckily with these expenses, you are able to remove the cost from the amount of profit you pay tax on. This can make a huge change in how much tax you have to pay at the end of the tax year.
Using qualified bookkeepers and or an accountant in most cases is not a legal obligation but will certainly help ensure your business tax documents are filed correctly and that any entitlements you have will be deducted.
Use the 30% rule
The 30% rule means setting aside at least 30% of your profits each month to save correctly for your taxes at the end of the financial year, however, this will only just cover what you will owe at the end of the tax year. This is a great idea for businesses big or small, especially if you believe you may not always generate enough profit to fall into a different bracket. This rule of thumb should also be worked into your cost of sale. By doing this ensure you are making money after the expense of the product and tax has been deducted.
Do not forget that there is more to pay than just tax. You need to also include national insurance which is taxed at 9%.
What are tax-deductible expenses?
UK tax law has several categories for identifying tax-deductible expenses as we; as options for tax relief these include:
Office, property and equipment
Car, van and travel expenses
Legal and financial costs
Marketing, entertainment and subscriptions
If you are self-employed this is a good site to look at for what can be deductible:
Expenses if you’re self-employed
If you are operating a formed business i.e a Limited Company the link below is a good site to look at for tax deductions:
Know your tax bracket
In the UK everyone has a personal allowance of £12,500 per tax year, this does include freelancers and sole traders. Meaning, you do not have to pay tax on the first £12,500 you earn. Once you go past this amount you then start falling into brackets. You need to get an understanding of what bracket your earnings will place you in when paying taxes.
Earnings between £12,501 and £50.00 the basic tax rate is 20%, meaning you will pay 20% of whatever profit you earn in taxes. Then the next bracket of earnings is between £50,001 and £150.000 which are taxed at 40%
After completing a self-assessment for tax, you need to pay tax according to the total profit you have earned across the financial year.
Your salary as an employee is paid through the PAYE system, this system will automatically deduct your taxes every month from your wages. When running a small business you have to work your tax out yourself.
As mentioned at the beginning of this blog the key to setting aside business taxes is planning. You have to make sure money is set aside each month to pay the tax bill at the end of the financial tax year.