Business tax includes several different types of taxes that work their way into the functioning of your business overall, each of them taxing the different areas and people of your organisation. Their individual rates and how they fit into the grand scheme of things is explored below.
Applies to company profits after salaries and expenses have been paid out but before the payment of dividends. It is a flat 19% charge and does not affect sole traders or partnerships. It must be paid nine months and one day after your business’s accounting period ends.
Value added tax (VAT)
Value-added tax is added to the cost of most goods and services. It is normally charged at a 20% rate though it is reduced to 5% for certain types of goods such as home energy cost, and it is worth mentioning that other goods might not be charged at all such as water and certain foods. If your company exceeds the VAT threshold of £85,000 as of 2022, then your own goods and services will need to be charged to customers on top of your own pricing.
You can be charged business rates if you are running your company from anywhere that is not a domestic property, such as an office, shop or warehouse. They will be calculated by the local authorities based on the rateable value of your business, which refers to its open market value if it was put up for sale. It should also be noted that even if you run your business from home there may be certain exemptions that could still cause you to pay business rates, such as the employment of employees, or the sale of goods and services to clients that come to your property.
If you happen to be a company shareholder and decide to pay yourself in dividends, you will be subject to dividend tax if you gain more than £2,000 from them. The amount taxed will depend on your income tax band, with 7.5% basic rate, 32.5% higher rate and 38.1% additional rate.
Income tax is paid by individuals if they go past their personal allowance of £12,570 a year for their wages. How much is taxed depends on your tax band with 20% being the basic rate if you earn between £12,571 and £50,270, 40% being higher if you earn between £35,271 and £150,000 and 45% being the additional rate if you earn even more. While this mostly applies to company employees and directors, sole traders may also need to pay it based on their own income from their business. If you are a sole-trader then income tax will need to be paid through a self-assessment form which must be completed by January 31st for online tax returns or October 31st for paper tax returns, however, if you are a company employee or director then it can be paid through PAYE.
If your business employs employees then you will need to pay their national insurance tax based on their earnings as the tax is used to fund pensions and public services. This will typically come down to 13.8% of employer contribution for employees with earnings higher than £9,568 as of 2022. The tax itself can be paid through PAYE for limited company directors, however sole traders will need to do so through a self-assessment tax return form that must be sent to the HMRC before January 31st, as well as part of your payment on account on July 31.
Pay as you earn (PAYE)
The pay as you earn scheme is not so much a separate tax as it is a mechanism that automatically collects income and national insurance tax for employees and directors of limited companies, therefore making the whole process easier to handle for large organisations and businesses.
Capital Gains tax
Capital Gains tax (CGT) is a tax placed on the sale of possessions for profit for individuals and the sale of assets or shares for businesses. Its rate will depend on the individual’s income tax leading to 10% basic rate and 20% for higher and additional rates. This goes up to 18% basic rate and 28% higher and additional rates if the sale includes a property that is not your main home.