February 19, 2022

A Guide for Small Businesses

Declaration

The majority of the information in this guide is aimed at small businesses ran by one person from home registered as a sole trader either with or without another income.

All the information in this guide is guidance only which I have curated from the government website. if you are ever in doubt please speak to a financial adviser or accountant

What is a small business

The companies Act 2006 states a small company as a company who meets 2 out of the 3 below requirements

1. Turnover no more than £5.6 million

2. Balance sheet no more than £2.8 million

3. No more than 50 employees

This excludes public companies and some other groups of businesses such as insurance companies.

Registering with HMRC

If you have made £1000 or more from your small business you need to register with HMRC. This is the amount you have made BEFORE deducting costs and expenses– for the sake of this ignore any income from you ‘normal’ job(s).

You will need to register by the 5th October after the tax year you made your income.

A tax year runs from the 6th April to the 5th April the following year.

Eg if you started trading 1 June 2021 you will need to register by the 5th October 2022

As a small business there are three types of business that you would normally registers as sole trader, partnership or a limited company

Submitting your tax return

If you make over £1000 a year you need to submit a tax return. (If you earn up to £1000 this is covered by the tax free trading allowance however if you use this you can not claim other tax free allowances such as clothing and travel expenses.)

Don’t worry this isn’t as scary as it seems! (For the purpose of this guide we have outlined the steps required as a sole trader)

Your tax is due the January after the tax year has ended and you are then normally able to pay in up to 12 installments, so there is lots of time to plan and prepare

e.g tax on any profit made between 6th April 2021 and 5th April 2022 will need to be submitted and a payment plan in place by 31st January 2023.

If you have another job you will need your latest P60.

Expenses

The easiest way to think of this is to include anything that you spend money on that you would not have spent if you didn’t run your small business.

I highly recommend getting an accountant to look over your expenses report before submitting if you are including expenses above and beyond just materials and overheads.

examples of things to include

  • Materials
  • Equipment
  • Travel expenses for travel done specifically for the purpose of the business
  • Increase in utilities and bills from running your small business from (0verheads)
  • Training
  • Cost of apps and subscriptions

Profit

when you submit your tax return you will need to input your total income and your total outgoings to calculate your profit – which is the value used to calculate your tax, vat and student loan deductions.

simply put

Income = money made through sales

outgoing = fees, material costs, marketing etc This also includes expenses which you may not think of (see next section). Although this bring your profit down it actually leaves you with more money as your are only paying tax on your true profit (and if not properly calculated you could be making a loss without realising.

As a sole trader your own wages can not be included in outgoings as all profit belongs to you.

This is where pricing your product or service is important

Income Tax

How much you pay depends on what other income you have. You will need to take in to account all incomes including pensions.

For the 2021/2022 tax year you will pay 20% tax on anything above the tax years tax free allowance of 12,570 and 50,270 – if you have another job you may already have used up your tax free allowance

You will pay 40% tax on anything between £50,271 and £150,000 and 45% on anything over £150,000. However once you hit £100,000 your personal allowance starts reducing so its wise to speak to an accountant or financial adviser.

For your business this tax is paid on your profit.

National Insurance and student Loan

If you have another job it is very likely you ay class 1 National insurance – this is paid on any earnings over £184 a week.

If you already pay national insurance, you don’t need to pay class NI unless

1 – you earn over £6,515 profits a year (class 2 and 4)

2 – you want to as you have gaps in your national insurance history. You need to have 35 qualifying years to qualify for the full state pension, although you would normally qualify for at least a partial pension with 10 qualifying years. (Class 3)

Lastly if you have a student loan, dependent on your profit and other incomes, you will also pay this via your tax return. This will vary depending on what you earn, if you pay any already and when you started university.

VAT

value added tax (VAT) is paid separate to your tax return and is usually done every 3 months.

you need to pay VAT if your turnover is over £85,000.

You can voluntarily pay VAT if you wish – one of the main reasons for this being you can reclaim VAT costs on your purchases

There are exceptions such as VAT exempt items ie children’s clothing and books.

If you need to start charging VAT this should be added to the cost of your items/services.

You also need to charge VAT if you run a shop/cafe/restaurant/pub – this also comes with it’s own host of rules and regulations.

Things to consider

Insurance – Your home insurance is not likely to cover your stock, equipment and liability. Check with them and if not get some business insurance

If you work in a a property or part of a property (eg a warehouse or office) worth more than £12,000 you may need to pay business rates – see www.gov.uk/introduction-to-business-rates

If you are selling edibles you will need to register with your local county council

Do you need to register or follow certain regulations with the items you are selling – for example toys, children’s clothes and wax melts

Do you sell products abroad? visit www.gov.uk/export-goods

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