Once your business is set up, tax quickly becomes part of everyday reality. Understanding the basics early helps avoid surprises later.

Whether you are just starting out or a well-established company, it never hurts to revisit the UK’s key tax rules to make sure you remain compliant.

The registrations that catch people out

Most businesses need to register for Corporation Tax, PAYE or VAT, depending on their structure and activities.

A limited company must register for Corporation Tax and file annual returns, even if it makes a loss.

If you employ staff, you will need PAYE reporting. If your taxable turnover exceeds £90,000, VAT registration becomes mandatory.

Getting registrations right matters because penalties are often linked to timing and compliance rather than intent.

Corporation Tax

A company is liable for Corporation Tax if it is incorporated in the UK or if its central control and management is exercised in the UK, even if it is incorporated abroad.

The information required includes:

  • Names of directors.
  • Name of parent company (if there is one).
  • Trading activity.
  • Period end date for the first accounts of the company.

Corporation Tax payment and return

Whether you are turning a profit or making a loss, there are some considerations you need to pay towards Corporation Tax.

Companies pay Corporation Tax on their profits and can relieve losses against past, current or future profits.

Whilst the accounting period reference date is quite flexible in the UK and can be chosen when the company is formed, the Corporation Tax return is due within 12 months of the end of the accounting period.

Corporation Tax returns must be prepared each year and filed online.

A copy of company or branch accounts must be filed online with the Corporation Tax return.

Current tax rates

The Corporation Tax rate for company profits since 1 April 2023 has been:

  • 25 per cent for companies with profits of £250,000 or more – this applies to all profits.
  • A Small Profits Rate of 19 per cent for companies with profits of £50,000 or less.
  • If the profit is between £50,000 and £250,000, the 25 per cent rate applies, but marginal rate relief reduces the overall corporation tax.

This sliding scale of tax can easily be overlooked and provides some useful opportunities for tax planning in the right circumstances.

Value Added Tax (VAT)

Value Added Tax (VAT) is imposed on most business-to-business and business-to-consumer transactions. Currently, this sales tax is chargeable by businesses if they are making annual taxable supplies exceeding £90,000. Some services and products are ‘zero-rated’ or ’exempt’.

A zero-rated supply is classed as taxable, but the VAT is charged at a rate of zero percent. Exempt supplies are not taxable and are ignored as far as the VAT registration threshold is concerned.

If the VAT threshold is exceeded or is expected to be exceeded in the near future, the business must register for VAT and must account for VAT on its supplies of goods and services.

When a business is registered for VAT, it must charge VAT at the prevailing rate on its sales of goods and services, where VAT applies.

The business must submit, usually every quarter, a VAT return showing the total VAT it has charged to its customers, as well as the VAT charged by its suppliers. The net amount is either paid to HMRC or claimed back from them.

A business may register for VAT on a voluntary basis before it is required to do so, provided that it can demonstrate its intention to trade or that it is already trading below the threshold of £90,000 per year.

Voluntarily registering could be a way to shift your mindset and pave the way for growing your business to the size you know it can reach. Just like you can dress for the job you want, you can also apply for VAT for the business of your dreams.

Since 2019, VAT-registered businesses have been required to keep digital VAT records and send returns using Making Tax Digital (MTD) compatible software digitally under the HMRC MTD regime.

Employment Tax – PAYE

As your business grows and you populate your workforce with more staff, there are several employee-based expenses that you will need to keep an eye on.

Every business organisation employing staff needs to be registered for Pay As You Earn (PAYE), dependent upon employee earnings see www.gov.uk/paye-for-employers.

However, all organisations must keep payroll records.

This is the system that HMRC uses to collect Income Tax and National Insurance Contributions (NICs) from employees as a deduction from their gross pay.

The PAYE collected is payable monthly to HM Revenue and Customs (HMRC) within certain time constraints; late payments will incur interest and may also incur penalties.

The tax deducted from salaries is Income Tax. Income Tax rates vary depending upon personal circumstances. The current rates are:

  • Personal Allowance up to £12,570 is tax exempt (zero per cent)
  • Basic rate covers any earnings between £12,571 to £50,270 and is taxed at 20 per cent.
  • Higher rate covers any earnings between £50,271 to £125,140 and is taxed at 40 per cent.
  • Additional rate covers any earnings over £125,140 and is taxed at 45 per cent.

NICs are deducted from employees’ earnings at the same time as income tax, and the company pays an additional fixed percentage of the pay as employer’s NIC. NICs will be discussed in more detail in a later section of this guide.

The company must also produce an annual payroll submission and provide the employees with a P60 by 31 May following the end of the tax year.

While payroll processing may not seem like a pressing concern for smaller businesses, it soon becomes a complex task as more staff become employed and can be a very complex area to get right. It can also take up a lot of time, removing your focus from the core business objective.

Getting on top of payroll processing and being aware of your ongoing responsibilities are vital ways to ensure your business can grow to its full potential.

An awareness of projected employee costs will allow you to effectively budget and make decisions on when it is time to expand your workforce.

You want to make sure that your growing workforce feels rewarded for their efforts and thus inspired to keep renewing their efforts to further grow your business.

There are penalties for incorrectly processing your payroll, so if you will be hiring employees, then allow us to take away the strain by dealing with your filing requirements – saving you precious time.

If you would like help managing your tax and payroll obligations as a business owner, please contact us.

This is the fourth article in a series of blogs to guide you through the process of establishing your next business.

Please find the rest of the series below:

Posted in Blog news.