If you are trading as a self employed individual or partnership, you should register with HMRC within 3 months of starting to trade. As our client, we handle all registrations with HMRC on your behalf.
A limited company is a vehicle for which you can run a trade through and is one of the options to be considered when starting a business. Many established businesses will also consider incorporating, this is when a trade is transferred into a limited company, previously having been run as a sole trader or partnership. A limited company is seen as a separate legal entity to you as the individual, therefore the company will have it’s own filing requirements with HMRC and Companies House. The director is responsible for ensuring the company meets these requirements.
The day to day trading will generally feel the same. The profits that the business makes, as a sole trader, belong to the business owner and personal income tax is paid on these in the year in which the trading occurred. Whereas, the profits the business makes as a Limited Company belong to the company upon which the company pays corporation tax.
The director would usually be paid a salary from the company and the after tax profits of the company are distributable to the shareholders of the company by way of a dividend payment. The timings for when a dividend is declared and paid out is chosen by the company. An individual would then pay any personal tax on these dividends via their own personal tax return.
The level of tax paid will depend on whether you are a sole trader, partnership or running a limited company. Your personal tax is paid for a tax year, which runs from 6th April to the 5th April. The amount you will pay will be based on your total personal income from all sources and is calculated at different rates for the various types of income and where these fall into HMRC’s tax band system. Business Tax payable is calculated on the taxable profits of a business at the applicable rates. The accounting profits are adjusted to arrive at what we refer to as the taxable profit, It is essential therefore to ensure the business expenses being claimed are allowable by HMRC and that all available allowances have been claimed. Sole trader and partnership profits are included within an individual’s personal tax calculation and are part of the individuals total income. Limited company business profits are declared on the company’s own corporation tax return.
HMRC set the VAT registration thresholds each year, which can be found on their website here. It is compulsory for you to register for VAT if your VAT taxable turnover exceeds the threshold amount for the preceding 12 months or if you expect your turnover to exceed this threshold within the next 30 days. A business with turnover under this VAT threshold does not need to register for VAT, however many businesses may choose to register on a voluntary basis to maximise their profits. Consideration should be given to the customer base and industry that you operate within as to whether this is advantageous to you.
The transactions for the business should be run through a business account ideally. With proper use, your personal and business transactions are kept separate and the business account would form part of your business records for accounts preparation and tax compliance. A limited company MUST have it’s own separate bank account as this is a legal requirement that the account is held in the company name.
To become an employer you need to register as an employer with HMRC. This is known as setting up a PAYE Scheme. You need to consider the national minimum wage requirements and implications to provide a Workplace Pension. You are required to submit your payroll data online to HMRC each time you pay an employee, on or before the pay date.