Business taxation – Start Up Guides – Part 10

Business taxation – depending on what structure you opted for you will eventually have to deal with either income or corporation tax.

There is not enough time or space for me to cover all the tax implications and ramifications of a new or existing business in this our tenth bite-sized Start Up Guide. I will however cover a few of the basics to help you get a better understanding of this vast and complex area, so the next time your accountant sits opposite you talking about ‘tax’ you have an idea what it is he is saying.

Firstly we will cover income tax. Income tax is payable by soles traders and partners in a partnership, as well as those who are employed.

The income tax year runs from 6 April to 5 April, however, you can, as a self employed individual have your year end at any date you wish.

A more common year end date is 5 April (or 31 March), choosing this date avoids some of the complexities that exist within the UK tax system where you can effectively get taxed twice on your first years profits, ask you accountant/advisor to explain this to you when deciding on what year end date you want to use.

Cashflow tip: When choosing a year end date even though 5 April is a convenient date it may be that you consider 30 April, why? Well simply put, if your year end is 5 April 2006 you will have to pay all your tax by 31 January 2007, but, if you have selected 30 April 2006 as your year end date you have until 31 January 2008 to pay all your tax, thus giving you extra time and easing cashflow.

The rates of tax for a sole trader/partnership are:










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There may also be a liability to Class 2 and Class 4 National Insurance Contributions depending on the level of profit.

Class 2 is paid on either a monthly or quarterly basis, and for the current tax year, which is 6 April 2006 to 5 April 2007, the amount is £2.10 per week.

Class 4 is paid based on the profits of the business over and above the personal allowance, which for the current tax year is £5,035. The rate of Class 4 is of 8% on profits up to £33,540 (that is from £5,035 to £33,540 which is profits of £28,505) and 1% on any excess over £33,540.

For the self employed tax is payable in three installments, the first two are based on the tax paid in the previous tax year. Therefore, the installment is paid on or before 31 January and the second installment on or before 31 July, the third is also paid on 31 January, and it is this third  installment that is the balance of any tax owed once the actual tax liability is known.

For example, J Blog has a year end of 5 April, in the tax year 6 April 2004 to 5 April 2005 (2004/2005) he paid tax of £10,000.

As Joe hadn’t had his accounts done when the Revenue assessed him for the following tax year (6 April 2005 to 5 April 2006) they based his payments on account ‘POA’ on the previous year as follows:

POA 31 January 2006    £5,000 (half of the previous years tax of £10,000)

POA 31 July 2006      £5,000 (the other half of the previous years tax bill)

When Joe had his accounts completed and his tax bill calculated in August 2006 it was discovered his tax was £12,000, it is this difference of £2,000 (the £12, 000 due, minus the £10,000 actually paid) that Joe will pay in January 2007 (his third installment), along with his first installment for the next tax year.

The self employed also have to complete a self assessment tax return every year, and although they have until the 31 January at the very latest to get it into the tax man, but please don’t leave it this long.

Next, Corporation Tax. Companies pay their tax differently to the self employed, and they pay corporation tax not income tax.

Unlike the self employed a small company pays its tax in only one payment, and this payment is due nine months and one day after its year end date.

Companies pay tax at 19% on the first £300,000 of profits, and then a higher rate thereafter.

Like the self employed a company also has to complete a self assessment tax return, this return is known as a CT600 but unlike the self employed  this return has to be with the Revenue 12 months after the company’s year end date.

I hope this bite sized guide has given you a better understanding of what is a very complex area. The key is to ask your accountant/advisor at every stage to explain things to you in plain English so that you can understand.

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