Types of Tax
There are so many different kinds of tax, it can be a little scary when you become self-employed and have to know which ones apply to you, so here’s a little guide to get you started:
1. Income tax and NICs.
If you are running a limited company, you will probably be paying yourself a nominal salary. This is subject to income tax and National Insurance contributions. As the Director, your salary will be subject to both employers and employees NICs. Income tax is declared in your Personal Tax Return.
2. Corporation tax.
Your taxable profit (the amount left after you have deducted your salary and business expenses) is subject to Corporation tax. You will need to submit a Corporation Tax Return to HMRC within 9 months and a day from the end of the financial year and it is advisable to have a contingency fund for this tax. We recommend retaining about a third of your profits for this tax.
3. Dividend tax.
After you have paid your salary, deducted business expenses and set aside a decent amount of your profits for the Corporation tax, you can pay yourself dividends for the remaining profits. It is advisable to maintain a healthy amount in the business, but what you do pay yourself in dividends will incur dividend tax. There is also a dividend tax credit however, which means if you pay tax at the basic rate, you will not have any dividend tax as the tax credit and tax rate balance out. High tax rate payers will owe a 25% dividend tax after the tax credit has been taken into account. Dividend tax is also declared in your Personal Tax Return.
For sole traders, all earnings/profits are subject to income tax and NICs and therefore the other taxes do not apply. Check HMRC’s website for current rates.
At QAccounting, we can assist you in understanding your taxes as well as filing returns and calculating how much you need to pay so you can be safe in the knowledge that it is all taken care of. Contact us for more information on how our accounting services could benefit you!
The article outlines the typical tax payment dates and methods of estimating the values of tax payable for each type of tax, including VAT, PAYE, NIC, CIS, Corporation Tax, and Dividend and Personal Taxes.
Rishi Sunak has proposed a number of changes to the way that Corporation Tax will be calculated and applied. Learn more.