Small Business Tax – Comprehensive Guide, a Must Read for Small Business Owners

SME’s and Small Business Tax, making it simple.

A recent survey of 400 small to medium sized businesses carried out by ‘Inspirem’ highlighted that 40 per cent are not confident’ that their expenses allow them to claim for the valuable tax reductions that they are entitled to. It’s no surprise really as small business tax can be so confusing. So where do you start? Small Business Tax can be split in Limited company Tax – the tax your company pays and Personal Tax as you’re taking money from your business.

What Limited Company Tax must I pay?

Corporation Tax

  • If your trading as a limited company, firstly you need to pay Corporation Tax. Currently in April 2011 this is 20% for all companies with profits under £300,000. So say for example your business sends an invoice to your client for £100,000 excluding VAT over the year and £20,000 of that was your expenses and salary than you’ll need to pay 20% on your remaining profit of £80,000. This will be due nine months and one day after the year end of your small business. Employer’s National Insurance Contributions Your small business will be liable to pay 13.8% on any salary you’re paid over £136.01. It’s that simple there are no changes of rates at different level of salaries, so this is very black and white for your small business.

VAT (Value Added Tax)

  • Most businesses are likely to register for VAT, which is currently at 20% in 2011. This will be added to the end of all of your invoices, and this money is given straight to HM Revenue and Customs. If your taxable income is less than £150,000 in your financial year, you’ll have the option of registering for the Flat Rate VAT scheme, where you have to repay less VAT. Most small businesses are registered on the Flat Rate VAT scheme, your accountant will be able to discuss this is more detail for you. What Personal Tax do I have to pay?

Income Tax

  • This isn’t that simple unfortunately and the majority of business owners end up very confused as you are both the owner taking dividends and an employee taking a salary. It’s important to remember income tax is based on the ‘Fiscal tax year’ so 6th April to 5th April not your small business financial year. It purely relates to personal worldwide tax income. Your personal allowance in 2011 is £7,475 anything you earn up to £35,000 is taxed at 20% and then £35,000 to £150,000 is taxed at 40% and 50% after £150,000. In addition when you reach £100,000 your personal allowance is reduced by £1 for every £2 of your income till it is reduced to zero at £114,950 so after this point you will be taxed 60%. This is why it is important to draw dividends from your small business to ensure you’re operating as tax efficient has possible, you will not have to pay any income tax on dividends up to the value of £35,000 and anything above this you will need to pay 25% which is significantly lower than Income Tax.

National Insurance

  • Lastly you need to pay your National Insurance (NI) contributions. You’re liable for this tax on anything you earn above £139.01 a week at 12% until you reach £817 per week and then this drops to 2%. All in all tax really doesn’t have to be complicated and with a specialist accountant in small business tax it will be come much easier and will make sure you make advantage of every benefit you may be entitled to.