A Business Owner’s Guide to Taxation in the United Kingdom

A foreign business owner’s guide on the current taxation laws for businesses operating in the United Kingdom.

The UK is continuing to prove itself as one of the most popular and fruitful nations in Europe to start a business.

In fact, according to the Financial Times, nearly 660,000 companies were established in 2017 – which is a major increase from 2015’s 608,000 total.

The chief executive of Octopus, Simon Rogerson, says: “Other than the US, the UK is unrivalled as a place to start and grow a business”.

Yet despite the growing appeal to both UK citizens and foreigners, the current laws surrounding taxation still remains a problematic area.

With this in mind, we’ve taken an extract from our new book, ‘How to run a business in the United Kingdom’, to help give you a better idea about taxation.

Corporation tax and income tax explained

Corporation tax applies to limited companies, but not to sole traders or partnerships. To qualify for this kind of taxation, you must register for it within your first three months of creation.

Apart from companies that make profits from oil extraction or oil rights in the UK, the corporation tax main rate is set at 19%.

Businesses are usually needed to pay this by a pre-set date, which is often nine months and one day following the end of the business’ accounting year. However, if your business earns profits of over £1.5 million per annum, this taxation is usually paid in instalments throughout the year.

If your business is running at a lost, you are still required to declare this to HMRC.

If you register as a sole trader, you pay individual income tax charged at 20% for profits between £11,501 and £45,000. Any profits and taxable income that fall under the £45,001 and £150,000 bracket are charged at the higher income tax of 40%.

So if you earn £160,000 in a financial year, you’ll pay zero per cent for the first £11,500, the basic 20% rate on £33,499 and the higher 40% on the remaining £104,999.

You can also reduce the amount you need to pay by claiming back on certain business expenses, including:

  • Entertaining staff such as Christmas parties and things for the office.
  • Customer gifts if they cost less than £50.
  • Fees incurred by obtaining loans, patents and registering trademarks.

On the other hand, you can’t claim expenses for:

  • Client entertainment such as dinner, coffee and drinks.
  • Asset depreciation and perceived losses.
  • Food, drink, tobacco or any other customer gift that promotes your brand.
  • Legal fees that relate to the issue of share capital, or matters to capital items like equipment, property and so on.

What is VAT?

Value added tax, otherwise known as VAT, is an extremely important element for you to remember. Although this 20% taxation is usually included in most products, you will find that a lot of service-based businesses are likely to include 5% VAT on as an addition to their flat fee.

Education, finance, insurance and the services of doctors and dentists are all exempt from VAT.

If your business generates over £85,000 per year in VAT-taxable income, you’ll have to apply for VAT registration. However, if you have a lower income than this, you don’t have to – unless you’d like to volunteer for it.

National Insurance

If you run a business and are registered as self-employed, then you might have to pay Class 2 and Class 4 National Insurance.

Class 2 National Insurance is paid at a fixed weekly amount, while Class 4 is charged as a percentage of your overall profits.

Other forms of taxation

There are various other taxes payable in the UK as well, like capital gains, real estate taxation and withholding tax. Here’s a quick run-down of what they are:

  • Capital gains – this is a tax against the profit made by selling an asset worth over £6,000 that has increased in value. This doesn’t apply if the capital gains are less than £11,700 during a financial year.
  • Real estate taxation – this tax percentage is charged depending on how much the sale of your real estate goes for.
  • Withholding tax – income tax in respect of recurring payments at source is sometimes collected by requiring the payer to make a deduction on account of income tax before making the payment – otherwise known as withholding tax.

For more detail on UK business taxation, buy our brand new book, ‘How to run a business in the United Kingdom’. You can get it in both paperback and Kindle format via Amazon.