Once you’ve written up your business plan, you can truly begin to get excited about getting your company going. But first, you’ll need to set up a business tax account. This ensures you’re not underpaying (or overpaying for that matter), but also means HMRC are aware of whether you are eligible for any new business tax breaks.
In this article, we’ve covered how to register a company with HMRC, what goes into setting up a business account, what taxes you should be paying as a business, and whether there are any tax breaks you can claim.
How to register a company with HMRC
When setting up a business account, the first thing you should do is register your company with HMRC. This is so there’s no discrepancy around your income and expenditure, as well as any startup funding; otherwise, you could end up paying business taxes incorrectly. Failure to register a new business for tax can result in steep penalties that far exceed what’s owed.
However, the process of registering a business tax account with HMRC varies, depending on whether you run a limited company or you’re a sole trader.
Register company with HMRC as a sole trader
If you’re registering as a sole trader, you will be responsible for filing tax returns for all annual company profits through your personal accounts. This means you’ll need to let HMRC know that you plan on paying tax through a self-assessment.
Registering a limited company with HMRC
When setting up a limited company, you’ll need to go through Companies House. They are responsible for registering all new limited businesses. Upon setting up your business, you’ll receive a unique Companies House registration number (make sure to look after this, as it’s likely you’ll need to provide your number when opening a business tax account at the bank).
Registering your business through Companies House will also sign you up for corporation tax. Finally, upon completing the setup process, Companies House will inform HMRC of your new business.
Setting up a business account
If you run a limited company, you are required to open a business tax account, separate to your own, as profits belong to the business rather than the directors. This new account should be in the name of your company, rather than an individual.
While you may, legitimately, consider the business (and any profits) your own, money held within a business tax account isn’t always straightforward to access and you’ll need genuine reasoning for withdrawing any sum; you can take a salary, dividends, and expenses, but cannot simply transfer additional money to your private account. But what about if you’re self-employed – do the same rules apply?
Do you need a business tax account if you’re self-employed?
Operating as a sole trader is different to running a limited company, for various reasons; one of which is that you aren’t strictly obliged to separate your personal and professional finances. This is because there isn’t a legal difference between the two, and all business profit is simply taxed on your earnings when you complete a self-assessment.
However, it is strongly advised that, even as a sole trader, you set up a business tax account for all ‘company’ earnings. Not only does this save you the hassle of manually juggling your personal income and company profits, but it can also make claiming company expenses more straightforward and save you a HMRC headache.
What do you need to open a business account?
When you open a business tax account, whether as a sole trader or limited company, you will require the following documentation:
- Proof of ID for named company directors (i.e. passport, driving license)
- Home addresses of each company director (usually going back three years)
- Full business address
- Your Companies House registration number (only applicable for limited companies)
- Your business’ estimated yearly turnover
In some instances, when setting up a business tax account, you may also be required to demonstrate a strong credit history.
What taxes do businesses pay?
Upon establishing your company, and registering with Companies House (where applicable) and HMRC, it’s time to start paying business taxes. We’ve outlined the five common duties you may encounter.
1. Income tax
Income tax is paid by individuals, as a percentage of their income (which may be made up of their salary, benefits, or dividends). The percentage deducted depends on how much an individual earns, but everyone has a personal tax-free allowance of £12,570 (up to a salary of up to £100,000, after which your personal allowance slowly reduces).
Your business is responsible for deducting the suitable amount of income tax from each of your employees’ PAYE (pay as you earn) income, and paying HMRC accordingly.
2. Corporation tax
Corporation tax is an amount payable by a limited company on all profits earned during the business’ financial period. This applies to profits from trading, investments, and the sale of assets (land, property, shares). Unlike income tax, there is no personal allowance for businesses; you’ll only be exempt from corporation tax if your company is working at a loss.
The current corporation tax rate stands at 19%. Importantly, all corporation tax is due 9 months and 1 day after the end of your company’s financial period; for instance, if your calendar year ends March 31st, your corporation tax should be paid January 1st.
3. National insurance
As an employee, you’re required to pay National Insurance on your monthly salary, if you earn more than £797/month; this is Class 1 National Insurance. As an employer, however, you are required to make Class 1A or 1B National Insurance payments, on your employees’ expenses. This works out at 13.8% of an employee’s income above £737/month.
If you are a sole trader, however, you won’t need to pay the limited company rate of 13.8% on your salary and benefits. Instead, you will pay Class 2 (and 4 National Insurance if you earn over a certain amount). Class 2 is applicable to any profits over £6,515, and works out at £3.05 a week. Meanwhile Class 4 works out at 9% National Insurance on profits between £9,569-50,270, and a further 2% on additional profits over £50,270.
4. VAT
Value Added Tax (more commonly referred to as VAT) is a levy paid by a business on all goods and services sold. Importantly, this even applies if you haven’t charged a customer VAT yourself. As such, it’s important that you incorporate the additional cost of the tax into your prices.
Currently, the threshold for paying VAT is £85,000, so you don’t have to opt in if your annual total sales falls below this amount. If your business sales exceed this amount, however, you are obliged to pay the standard fixed rate of 20%. VAT doesn’t apply to everything, though, and there are some items that are exempt from VAT payments, so it’s well worth clarifying how much your business should be paying.
5. Business rates
When you establish a business premises, you are obliged to pay business rates on the value. Premises that apply include shops, offices, warehouses, and factories. However, if you work from home, you’ll often be exempt from business rates, unless:
- You employ staff who also work at your home.
- Customers visit your home to buy goods or services.
The council will send you your business rate bill each year, usually around late winter/early spring. Your business rate is based on the rental value of your company premises, which is then multiplied by either 0.512 (this is the standard multiplier, for rateable values equal to or exceeding £51,000) or 0.499 (this is the small business multiplier, for rateable values below £51,000).
Are there any tax breaks for starting a new business?
A tax break, or tax relief, is a concession allowed by the government that reduces the overall amount of taxation owed during a financial period. When registering with the tax office, it’s important to try and take advantage of as many new business tax breaks as possible. We’ve picked out five you might benefit from.
1. Allowable business expenses
Every business incurs everyday costs and expenditure, which can all add up. To lessen the financial load, take advantage of tax breaks for allowable expenses. These include, but aren’t limited to:
- Office running costs (including rent)
- Travel costs
- Clothing (if staff are required to wear a uniform)
- Training
- Marketing and advertising (including website running costs)
- Employee salaries
Make sure to keep a record of your limited business’ expenses, and file your accounts with Companies House. If you’re self-employed, you can also claim a reasonable portion of your heating, electricity, council tax, and internet usage back as a business expense. To claim as a sole trader, simply list your expenses on your self-assessment.
2. Small business rate relief
Business rates are applied to non-residential company premises, but you may be eligible for tax relief if your property’s rateable value is below £15,000.
Tax relief here is worked out according to a sliding scale between £12,000-15,000; a property with a rateable value of less than £12,000 doesn’t have to pay any business rate tax, while a property with a rateable value of more than £15,000 wouldn’t receive any relief.
For instance, if your rateable value is £13,500, you will be eligible for a 50% business rate tax break. Get in touch with your local council to see if you’re eligible for the relief.
3. Employment allowance
If you are an employer, you could claim up to £4,000 tax relief on National Insurance payments (overall, not per employee). If this applies to your business, you’ll pay less National Insurance each time you run payroll, up to the £4,000 threshold. This resets annually, though, so make sure to check if you’re eligible and reapply each year.
4. Research and development relief
If your limited company contributes in some way to the development of science of technology, you may be able to claim this tax break for new business. HMRC’s qualifying criteria can be quite strict, though, so try to establish beforehand if you’re eligible. However, the main factors are that your company hires less than 500 staff and records a turnover of less than 100 million euros a year. Additionally:
1. That you are looking to make an advancement in a scientific or technological field.
2. You have overcome/tried to overcome uncertainty (your venture doesn’t have to have been successful, you just need to evidence that you tried).
3. The problem couldn’t easily be solved.
5. Annual investment allowance
Annual Investment Allowance relief allows your small business to deduct the cost of ‘plant and machinery’ from profits when paying tax. In short, plant and machinery refers to:
- The items and apparatus you keep for use exclusively within the business (including cars and computers)
- Integral operational features (including air conditioning, central heating, and electrical systems)
- Fixtures (including fitted kitchens and bathrooms)
Setting up a business account and registering a new business for tax needn’t be more complicated that necessary. There might be a few steps to follow, but, by following our guidance, you can start trading in no time. For even more information, explore all there is to know about setting up a business or marketing your brand, or if you still need to set up a website, choose your perfect domain name.
