Do you dread the thought of filing your tax return or managing your business finances? Keep reading this blog to learn about tax types in the UK and turn that fear into confidence.
In this guide, we will discuss the topics you need to understand to conquer your tax and accounting woes once and for all.
UK Tax Full Guide: Tax and Accounting
Tax and accounting can be overwhelming, but they are essential for individuals and businesses alike. From filing tax returns to managing finances to maximising tax savings, tax and accounting play a crucial role in any business.
That’s why it’s essential to have a clear understanding of tax and accounting principles. In this blog, we will provide you with a comprehensive guide for a better understanding of these difficult business topics in the UK setting.
Tax Types in the UK
The UK tax system is complex, and here are some of the most common tax types that you should be aware of:
Value Added Tax (VAT)
Registration for VAT is mandated if your business’s annual turnover exceeds the VAT registration threshold of £85,000. VAT returns are usually filed and paid quarterly, with deadlines one month and seven days after the end of the quarter.
Corporation tax is computed and paid based on your company’s profits. If you have a limited company, you must pay corporation tax on your profits.
The current rate is 19%, but it is subject to change. Corporation tax returns are due within 12 months of the end of your accounting period, and payment is due within nine months and one day of the end of your accounting period.
Individuals who earn income, including profits from their businesses, are generally required to pay income tax in the UK.
This means that sole traders and partners in a partnership are typically subject to income tax on their business profits and any other income they may earn.
Self-assessment tax returns and the tax liability are both due by the 31st of January following the tax year-end. You may also need to pay on account by the 31st of January and 31st of July if your tax bill for the previous year was more than £1,000.
National Insurance Contributions (NICs)
Self-employed individuals and partners in a partnership are required to pay NICs. Class 2 NICs are usually paid monthly or six-monthly, and the deadlines will depend on your payment method.
Class 4 NICs are paid alongside your income tax, so the deadline is the 31st of January, following the end of the tax year.
Business rates are paid by businesses that occupy non-domestic properties. The amount you pay depends on the rateable value of your property, and you may be qualified for small business rate relief if your property for rating has a value of less than £15,000.
Business rates are usually paid in 10 monthly instalments from April to January, and the exact deadlines will depend on your local council.
Types of Tax Accounting
After knowing the different tax types that you may be obligated to pay, you also need to be aware of the different methods of accounting you can use to record and report your business transactions:
This method records transactions when money is received or paid rather than when the transaction is made. Often, this is used by small businesses or those with more straightforward finances.
Using this method, you must record your business transactions as they occur, regardless of when the money is received or paid. This is often used by larger businesses with more complex finances.
Who Carries Out Accounting?
When choosing how to maintain accounting for your business, you have the liberty to choose between in-house and hiring an outsourced professional accounting firm.
Regardless, at least one accountant should carry out all of your business accounting affairs.
Benefits of Tax Accounting
Businesses of all sizes should have proper tax accounting in place. Here are some of the reasons why:
- Minimising Tax Liability. An accountant can help you identify deductions and credits to lower your tax bill.
- Avoiding Penalties. Non-compliance with tax laws can result in penalties and fines. An accountant can help you meet all tax obligations and avoid costly penalties.
- Improved Decision Making. Accurate financial statements and tax records can help you make informed decisions about your business.
- Peace of Mind. Knowing that your tax affairs are taken care of by an accountant using proper tax accounting can provide you peace of mind and can divert your focus on growing your business.
Frequently Asked Questions
What is the difference between tax avoidance and tax evasion?
Tax avoidance is using legal methods to reduce or minimise tax liabilities. It involves taking advantage of tax laws, exemptions, and deductions to legally minimise the amount of tax you owe.
On the other hand, tax evasion is the illegal non-payment or underpayment of taxes. It involves deliberately concealing or misrepresenting income or assets to avoid paying taxes.
Serious consequences can happen if you commit tax evasion, from simple fines to criminal charges.
How to register for self-assessment tax in the UK?
Upon self-assessment tax registration, you will need to complete an online registration form on the HMRC website and provide your personal details, National Insurance number, and information about your income and employment status, among others.
How is income tax different from VAT?
In a nutshell, income tax is a tax on earnings, whereas VAT is a tax per consumption.
With that, income tax is paid by individuals and businesses based on their profit and other sources of income, while VAT is paid by consumers when they purchase goods or services.
Another key difference is that income tax is progressive, with higher earners paying a higher tax rate, whereas VAT is a flat rate tax applied equally to all consumers regardless of income level.
It is truly challenging to understand how tax and accounting work and how they can be applied to your business. However, we hope that this UK Tax Guide has provided you with enough clarity and can actually be useful in your business endeavour.