When you are starting up a business, one of the most important considerations, which is always ignored, is to decide the legal structure of the business. There are various legal structures in place and each of them has various tax implications. I have highlighted few important points in regards to those structures and the implications thereon.
If you are sole trader, your tax obligations are simpler than if you are working through a partnership concern or a limited company. You need to pay income tax, national insurance and register for VAT but only if your turnover exceeds a certain threshold.
But you must inform HMRC because only then they can send self employment tax return and set you up as self employed on their systems. You will then have to declare all your income and claim all the business expenses.
You will also have to notify National Insurance Contributions Office and potentially pay Class 2 and 4 national insurance based on the level of business profits. But you do not have to pay Class 2 national insurance if your earnings are less than £5,595 whereas Class 4 national insurance does not trigger if your earnings do not exceed £7,605 per annum.
- The tax year runs from 6 April to the following 5 April
- The due date of filing paper return is 31 October after the end of tax year whereas your online tax return must reach HMRC by 31 January after the end of tax year
But please note that you will also have to make the payments on account for the following tax year in two equal instalments if your tax liability for the previous year exceeds £1,000.
If you are contemplating joining a partnership or start a business with a partner or partners, then actually, you have three options: forming a conventional partnership, a limited liability partnership or form a limited company with your fellow partners as directors of the company.
For tax purposes, conventional partnership and limited liability partnership gets the same tax treatment and all the above deadlines are applicable to all the partners of the partnership as they are classed as self employed.
However, if partnership employs staff, it would have to operate PAYE and deduct income tax and national insurance as well as employers’ national insurance from their salaries.
The directors of a company are not self employed. In fact, they get paid a salary which is taxed in the same way as other member of staff. But the important point is that a director can get dividends from the company profits. However, a limited company will have to pay corporation tax on its profits.
- If the profit of the company does not exceed £1.5m, corporation tax is payable nine months and one day after the end of company’s accounting period.
- Corporation tax return must be submitted with HMRC within 12 months of the end of its accounting period.
- Large companies are liable to pay corporation tax in instalments. A large company is one with taxable profits exceeding £1.5m a year.
- A company must notify HMRC within three months after the beginning of the accounting period.
Before taking a decision on any of the above structures, you should bear in mind your resources, administrative capabilities and other financial commitments. If you need to explore more to find out which structure is more suitable to your personal requirement, then please do not hesitate to contact me on 020 8543 1991 or drop me an email on email@example.com