Taxation
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National Insurance
Class 2 National Insurance is payable by the self-employed unless they can demonstrate that their earnings will be very low. Class 4 National Insurance is payable on self-employed earnings between certain levels, based upon the profit for the relevant year. It is payable at the same time as income tax and is effectively a tax.
For employees, including directors, Class 1 National Insurance is payable on their earnings. Registration
If you are setting up as a sole trader or a partnership, you will need to register with the Inland Revenue and the Contributions Agency, who administer National Insurance. This is done on the same form, which is available from both departments.
HMRC have released a series of videos providing more information about paying NI as an employee, director, sole trader, or partner. For more information, watch the video here
Income Tax
For sole traders and partnerships, the taxation rules in the opening years are often not straight forward, especially with the timing of the tax payments. Under self-assessment, self-employed people are taxed on a current-year basis. The tax is payable in two halves, on 31 January and 31 July, with the balance payable on the following 31 January when the Tax Return is also due. The relationship between accounting periods and tax payments will depend upon the year-end chosen. Having a 31 March year end is simplest but has a cash-flow disadvantage as the first instalment of tax is due before the year end to which it relates. You should seek advice on the most appropriate year end for you – you can choose.
Watch the HMRC video on Income Tax here
Corporation Tax
Any profits made by the company, after deduction of directors' remuneration, will be subject to Corporation Tax. Corporation Tax is payable nine months after the year-end, and, unless profits are over a certain limit, are taxed at the smaller companies rate of 19%.
Watch the HMRC video on Corporation Tax here
PAYE
Info by Gavin Don
As an employer you pay the government for the privilege of taking on staff. Basically, you will pay 11.8% of each month's gross salary as tax on top of the deductions you make from the employee. This is called Employers' NI. Each month you tot up the gross pay, deduct the employee's tax and NI (use a payroll company to do the calculations as they are arcane, Moorepay is a good one), add 11.8% of the gross, and then send the deductions and the 11.8%s to the Revenue.
Watch the HMRC video on employing staff, or visit the HMRC website for more information on using PAYE online.
