Starting a new business is exciting and at the same time a bit nerve-wracking because there are so many things that new business owners need to take account of. Getting up to speed on current tax information is particularly important because getting it wrong can be an expensive mistake. Here are a few things that start-up business owners need to remember.
The tax rules for self-employed people are much more complex than those for typical employees. Being prepared for this and making sure a business is protected from the outset is important. Setting up a limited liability company is a protective measure, particularly when a new business is associated with a high commercial risk. Limited liability means that any claim that might be made would be against the company and its assets, and not against the personal assets of the business owner.
Running a limited company also offers the option of taking a dividend as a shareholder. This is a good alternative to taking a salary, which can of course be taxed at up to 40% depending on profit levels; dividends attract a lower rate of income tax and are not liable for national insurance contributions (NIC).
Being a sole trader or partnership
Where commercial risk is not an issue, there is very little point in creating a limited company. This is particularly the case if the business owner intends drawing out all the profits as salary, which would then be subject to PAYE tax. In this case being a sole trader or in a partnership may be just as advantageous, as business owners are taxed on the profits whether they draw them out or not.
Employee status indicator
It's important to be aware of how problems concerning tax status can arise – specifically when the distinction between being employed and self-employed can become blurred, for example when a sole trader business becomes a regular supplier to another business or sole trader. The HMRC website includes a special online employer status indicator tool that can be a useful signal as to how they may view employment status for tax purposes.
When a new business in the UK is successful in attracting income from another country it may be liable to pay tax in both countries under their individual tax laws. This is known as double taxation, and there are a number of double taxation treaties that help businesses that trade internationally to claim tax exemption or partial tax relief in the UK. Finding out about international tax is also important for highly paid individuals who spend some or all of their time living and working abroad.
Staying up to date
Legislation changes, as do tax rules. When running a business staying up to date with changes to the requirements for record keeping, managing a payroll and handling value added tax (VAT) is key. In the same way, being clear about self-employed status and NIC is essential for sole traders and partnerships.
Taking the time to get clued up about tax issues is definitely worth it.