When do small businesses need to start paying tax?
You’re finally doing it. Your small business is finally starting to take off, you’re trading profitably and starting to make money out of your company to pay yourself.
But with all trading comes tax liabilities and it’s important that you understand business tax as soon as possible.
When to register your new business for tax
As soon as your business starts trading, you should register it with HM Revenue and Customs. If you set up a sole trader or you are a partner in an unincorporated partnership, this must be done by the 5th October following the end of your first tax year trading. Failure to do so could result in heavy penalties.
Sole traders and partnerships can register online on the gov.uk website, or by calling the HMRC Newly Self-Employed Helpline on 0300 200 3504.
Those registering a private limited company must do this through Companies House. You need to do this within three months of starting your business. You can register by clicking here.
Find out more about your tax responsibilities as a sole trader, partnership or limited company below.
When to pay personal tax
The person tax year runs from the 6th April to the 5th April in the following year and there need to be a few dates that you’re aware of:
31st October – due date for paper tax returns for current tax year
31st January – due date for online tax returns for previous tax year
31st January – due date to pay any taxes owed
5th October – Register for self-assessment for next tax year
Work with your accountant to ensure all returns are filed and money owed is with HMRC by these deadlines. If you miss a deadline, you’ll be fined.
When to start paying tax
When you need to start paying tax will depend on the structure of the business you’re running.
If you are a sole trader…
As the sole owner of your business, you’ll need to calculate your tax bill by filling out a self-assessment form. These tax returns must be filed with HMRC by the 31st January at the latest.
The tax you pay will depend on the amount of profit you have made during the tax year. You are entitled to the same personal allowance as any other employee. That means you won’t need to pay income tax on the first £11,850 profit your business makes. After that point, the amount of income tax you pay depends on the amount you earn during the year.
You’ll pay Class 4 National Insurance on all earnings above £8,424. Regardless of the profit (or loss) you make, you’ll also have to pay Class 2 National Insurance at £5.80 a week.
If you are a limited company
In addition to registering with Companies House, limited companies also need to register for Corporation Tax separately within the first three months of your business starting trading. This must be paid nine months and one day after your accounting period ends.
The difference between a limited company and a sole trader is that it is the company that makes a profit or a loss - your personal finances are completely separate. That means any profits you do make belong to your company (and not you) after the corporation tax has been paid.
As a limited company director, you’ll be required to:
- Send an annual return to Companies House
- Send HMRC a company tax return
- Keep statutory accounts
Most directors will pay themselves with a combination of salary and dividends – dividends are a way of distributing profit from a business. As with a sole trader, you’ll need to complete a self assessment form every year.
If you are in a partnership
This could be a non-incorporated business partnership or a limited/limited liability partnership – either way, your tax obligations will be the same.
Where the partners of a business all share profits made, each person is required to send HMTC their own personal self-assessment return and pay the tax on their own share of profits.
Speak to your accountant
With all company structures, as soon as you turn over more than £85,000 in a rolling 12-month period, you will need to register for VAT
If you have any further questions about your business and personal taxation as a company owner, call us on 01235 768 561 or email email@example.com.