Tax

Which taxes does an entrepreneur have to pay? How much?

Income Tax – 20% (basic)

The taxable income of an individual is gross earnings less allowable expenses and deductions. The net profits from an entrepreneur's sole proprietorship or partnership concern become part of taxable income, and hence liable for income tax. The newest tax rate is:

20% for taxable income up to £31,865
40% for taxable income between £31,866 and £150,000
45% for taxable income over £150,000.

Corporation Tax – 20%

Corporation Tax is a tax on the taxable profits of limited companies. The current corporation tax rate is 20% for business profits of £300,000 or less. The Corporation Tax rate may change on 1 April each year.

For more about Corporation Tax, you can find out here.

Value Added Tax (VAT) – 20%

Most business-to-business or business to customer transactions attracts Value Added Tax (VAT). The standard rate is 20% in UK. Some items qualify for a reduced rate of 5 percent and some other items enjoy a zero rate. Still other items are exempt or outside the scope of VAT altogether. New businesses however become liable to pay VAT only after the VAT taxable turnover for the previous 12 months crosses more than £73,000.

Businesses importing and exporting products outside the European Union become liable for import VAT and duty. The rate depends on the type of product and country or origin

You can find out here about VAT.

National Insurance – 12% (basic)

National Insurance is a deduction from earnings to fund various State benefits. You pay National Insurance if you’re:

16 or over
an employee earning above £153 a week
self employed and making a profit over £5,885 a year (unless you get an exception)

If you are a sole trader, you are considered as a self-employed person thus subject to National Insurance. If you’re a director of a limited company, you might be the employee of yourself and subject to National Insurance. If you employ other people, as an employer, you deduct the contribution from the employee’s earnings. The rate for 2014 is 12% for earnings of £153 to £805 a week (£663 to £3,489 a month). New rates will be announced from 6 April 2015.

For more about National Insurance, you can find out here.

Pay As You Earn (PAYE) – 20% (basic)

As an employer, you normally have to operate PAYE as part of your payroll. You deduct the PAYE and the National Insurance contribution from your employees’ wages. The amount of Income Tax you deduct from your employees depends on their tax code and how much of their taxable income is above their Personal Allowance. The basic rate is 20% on annual earnings above the PAYE tax threshold and up to £31,865. You can refer to the Income Tax rates mentioned above.

Here is A Guide of PAYE for Employers.

How do I pay for my taxes?

Income Tax

The payment of Income Tax and National Insurance is through a Self Assessment system, by filing a tax return at the end of every tax year. The entrepreneur has to register with Her Majesty Revenue and Customs (HMRC), which has offices in Strand, WC2 (nearest tube stations: Charing Cross, Embankment and Covent Garden) immediately after starting the business to set up the National Insurance contribution records.

Corporation Tax

Newly established companies need to fill in form CT41G and submit the same to the appropriate Corporation Tax Office within three months of incorporation. You can find out more about how to pay your corporation tax bills here.

Value Added Tax (VAT)

You can submit your VAT return by logging in to your HM Revenue and Customs (HMRC) online. For more about how to pay your VAT, you can find out here.

National Insurance

As a sole trader, you pay National Insurance with your tax. As an employer, you will take out the National Insurance contribution from your employees’ wages before they get paid. Access here for a Guide to National Insurance Contributions (NICs).

Pay As You Earn (PAYE)

Same as National Insurance contribution, you deduct PAYE from the wages of the employees before they get paid.

Starting or running a business?

Tax