If you're self-employed, you pay Income Tax and National Insurance on what is known as 'taxable income'. Taxable income is mainly the profits you make from working for yourself (whether as a sole trader or partner). You pay Income Tax and Class 4 National Insurance through the Self Assessment system. You will need to fill out a tax return following the end of every tax year. As soon as you start in business you will need to register with HMRC so that the correct tax and Class 2 National Insurance contribution records can be set up.
The most popular legal structures for start-ups are sole trader, partnership and private limited companies.
Source: online.businesslink.gov.uk
Partnership
We are a standard partnership of 4 creatives.
Anything that one partner does affect all of the partners, because each partner of the general partnership is personally responsible for all obligations of the partnership deals. Thus, each general partner's exposure to risk is increased by a factor equal to the number of general partners in the business.
Source: ukincorp.co.uk
The profits and gains of the partnership are shared among the partners. Each is personally responsible for paying tax on their share. The nominated partner needs to register the partnership with HM Revenue & Customs (HMRC). Each partner also needs to register themselves with HMRC. This helps HMRC set up the right tax and National Insurance records for both the partnership and partners.
The partnership should appoint one of its officers - the nominated partner - to fill in the Self Assessment Partnership Tax Return and send it to HMRC. This includes a Partnership Statement, which shows how profits or losses have been divided among the partners. The nominated partner should also ensure that all other officers are given copies of the Partnership Statement to help them complete their own tax returns. Although the nominated officer has responsibility for the Partnership Tax Return, all the partners are jointly liable for any penalties resulting from it being submitted late or incorrectly.
If the partnership has - or expects to have - turnover of more than £73,000, it will need to charge VAT to its customers and pass this on to HMRC.
Source: businesslink.gov.uk
National Insurance contributions
If you're self-employed and your annual profits are over a certain amount you normally have to pay Class 4 National Insurance contributions in addition to Class 2 contributions. The amount of Class 4 National Insurance contributions you have to pay for any tax year is based on your profits for that year. You pay 9 per cent on annual profits between £7,225 and £42,475 (2011-12) and 2 per cent on any profit over that amount.
Limited company
Aside from the sole trader route, the limited liability company is the most popular business structure in the UK. The liability of company directors is ‘limited’ in that the company’s finances are separate from personal finances, which is not the case for sole traders. Limited company shareholders are not responsible for any debts run up by the business, although directors may need to guarantee loans or credit taken out in the company’s name.
There are some high level requirements which all limited companies must fulfil:
- The company must be registered at Companies House
- The company’s annual accounts must be filed at Companies House
- Annual Return (Form AR01) must be completed each year to ensure Companies House records the most up-to-date information about the company. This is subject to a modest annual fee.
- HMRC must be informed if the company has any profits or taxable income on an annual basis.
- Every limited company must complete an annual corporation tax return. Any liabilities must be paid within 9 months of the company year end.
- All company employees must pay income tax and NICs on any income they receive.
Source: bytestart.co.uk
If you're a sole trader or partnership, there's no better time to convert your business to a limited company. Here are six reasons why:
1. The principal benefit of trading as a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets are at risk in the event of failure of the business, but this is not the case for a limited company. As long as ths business is operated legally and within the terms of the Companies Act, directors' or shareholders' personal assets are not at risk in the event of a winding up or receivership. And as often happens on occasion, such events are not always under our own control.
2. The first £10,000 of a limited company's profits are tax free. This is not the case for sole traders and partnerships.
3. Company profits may be distributed as dividends to shareholders. Presently, National Insurance is not applicable to dividend payments, effectively reducing your tax liability still further.
4. Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Quite often, larger organisations in particular will prefer not to deal with non-limited businesses.
5. The costs associated with managing and operating a limited company are not significantly greater than with non-limited businesses. Accountants and other professional advisers may have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms - at least from the perspective of taxation and accountancy - changes to legislation over the last few years have meant much lower costs associated with limited companies.
6. There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients form companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.
Source: talktalk.co.uk
No comments:
Post a Comment