Taxing Matters: Impacts to Small Businesses in Tax Year 2022/2023

Taxing matters can get complicated for small businesses. Learning the difference between corporation tax, income tax, capital gains tax, and VAT can be overwhelming — and then you have to figure out how to calculate and process them. While it is an exasperating procedure, it’s critical to have a good understanding of your taxes to avoid being penalised. It’s imperative that you don’t pay your tax late, file your tax return after the deadline, or provide any inaccurate information — and if unreliable tax management becomes a consistent pattern, it will prove fatal to your business. 

The good news is that you don’t have to worry about all of these, it’s all about the type of business you run. The current tax year runs from April 6th 2022 to April 5th 2023, but the calendar runs a little differently for tax deadlines. In this article, we will go through what each tax is and how to process them — so that when the next deadline comes up, you can breathe a sigh of relief instead of frustration.  

limited companies and corporation tax

Limited companies vs. sole traders

How your taxes are processed is based on how your business is structured. The main difference is that limited companies pay corporation tax while sole traders and partnerships pay a combination of income tax and capital gains tax. These differences will be discussed in further detail later in the article. 

 

Additionally, it also impacts the tax obligations of your business. Tax-free personal allowance as a sole trader is £12,500, if you don’t earn this much then you don’t need to pay any income tax. Above this and you will pay income tax according to your tax code. Limited companies are required to send Companies House a few documents — this includes an annual tax return, compile statutory accounts, company tax return, and VAT registration. As the director of a business, you will have to complete a self-assessment tax return process for employer’s national insurance contributions. 

Corporation tax

As mentioned above, sole traders and partners don’t have to pay corporation tax. It is only applicable to limited companies and it is the primary form of tax that a limited company must pay. 

This is a tax based on the profits your business made over the financial year. It is calculated after salaries and other business expenses have been paid, but before dividends are withdrawn. 

You’ll need to register for corporation tax within three months of setting up as a limited company, but it is ideal to do this as soon as possible. To pay corporation tax, you’ll need to submit a CT600 form to HMRC, otherwise known as a company tax return. This will provide details of the company’s income, including deductions for tax allowances and expenses. It must be paid nine months and one day after your business’s accounting period ends, which is when your company was first set up. Please ensure that you distinguish between the tax year and your accounting period — this is because it is most likely that there will be a variety of dates you will have to keep in mind, so it’s important to schedule according to your respective tax deadlines. Bare in mind that it is down to your business to declare how much corporation tax is needed to be paid, HMRC will not instruct you. 

The current corporation tax rate is 19%, but this may change from time to time. This is the percentage you pay based on your profits made within the accounting period. As a limited company, you have a responsibility to submit year annual accounts and corporation returns. Our business accounting service will give you confidence your accounts are being prepared by professionals to ensure you account for all costs and income correctly. Our service includes corporation tax return computations and submissions, confirmation statements and reliable asset analysis for early tax relief. 

Can you lower corporation tax?

There are a number of ways you can reduce your corporation tax bill. One way to get a corporation tax deduction is through share schemes which can be offered to employees. There are many schemes available, so it’s important to do your research to ensure you’re using the best one for your business. Offering shares to your employees, it’s a great way of incentivising and rewarding them. This are a range of options you can pursue to reduce corporation tax, this is just one example.

Most importantly, remember to claim all your business expenses. It’s important to have thorough documentation of your expenses as it will prove very useful when you process your tax returns. Good bookkeeping is one of the most essential areas of financial management as it ensures you stay on top of your taxes. However, we understand this can be confusing and time-consuming — this is where outsourced accounting can be exceptionally helpful. At Wilkinson Accounting Solutions, our bookkeeping service provides every customer with an experienced account manager who will overlook your business’s accounts according to its financial model. We can ensure vital information is documented timely, accurately, and appropriately details to support your reporting processes. Our service includes detailed corporation tax reviews and submissions, timely bank reconciliations, and accurate balance sheet reconciliations. To find out more about our bookkeeping service, get in touch with us today to find out more. 

accountant lowering corporate tax
income tax arrangements

Income tax (Tax Year 22/23)

Instead of corporation tax, sole traders and partners are required to pay income tax. This is a tax based on your personal income, including salary and dividends. Income tax is only payable by individuals and isn’t representative of the business as a whole. If a business owner is above the personal allowance in the tax year 2022/2023 (£12,570) then you are legally required to pay income tax. 

 

The rate you pay will depend on your tax band. The basic rate for income tax is 20% then 40% and 45% for higher and additional rate taxpayers respectively. Other earnings besides your salary — such as capital gains, dividends and/ or capital gains — may also come under your income and will push you into a higher tax band. 

 

As a sole trader, the amount of income tax you pay is based on the profit made from your business. For this, you will need to complete a self-assessment tax return to HMRC to calculate how you owe. If you are a limited company director, income tax is paid through your business’s PAYE scheme. PAYE (Pay As You Earn) is HMRC’s system to collect income tax and National Insurance from employees.

Capital gains tax

If you are a sole trader/ partner and have sold assets that have increased in value, you will need to pay capital gains tax. Capital gains tax is different to income tax in that it is specifically for assets or shares that you have sold. For limited companies, this is filed under corporation tax. 

 

The basic rate for CGT is 10% while there is a rate of 20% for higher or additional rate taxpayers. However, different rates apply if the asset you’re selling is a business property (that isn’t your main home) and it increases to 18% and 28% respectively. Capital gain also impacts your income and may bump you into a higher tax bracket. 

 

To calculate a capital gain, you take the sale price of the asset and then deduct what you paid for it, as well as any investments in the business and other expenses involved in the process of buying or selling it. Additionally, you can reduce your capital gain tax by claiming business assets relief, also known as entrepreneurs’ relief. While there is a specified criterion, one qualification states you need to be a sole trader/ partner selling at least part or all of your business or its assets. If you qualify, you’ll pay a lower rate of 10% on the first £1m of gains. 

capital gain tax optimisation

National insurance

 

If you have employees, you will need to pay employer’s national insurance contributions. As an employer in the UK, it is one of your duties to do this. The current rate for NIC is 15.05% and businesses need to pay this for all employees who earn over £12, 570 for this current tax year. This is processed through your business’s PAYE scheme. 

 

If your business is eligible for employment allowance, NICS can be reduced by up to £5000. This was put in place specifically to help small businesses. 

VAT

Value-added tax (VAT) is a consumption tax that is added to most goods and services. This is a tax that is added at each stage of the supply chain, from initial production to the point of sale. 

 

If your company is VAT-registered, you are required to charge VAT on top of your product prices. In the UK, the standard VAT rate is 20% but certain goods and services have a reduced rate of 5% such as children’s car seats and home energy. Please note that there was a temporarily reduced rate of 5% for the hospitality, hotel and leisure sectors but this has now ended. VAT is not applicable for certain goods, this includes education, sporting activities and certain medical treatments. To learn more about how VAT impacts your business, please refer to the government website for official guidelines. 

 

If you supply VAT-able goods or services and your annual turnover doesn’t exceed the VAT threshold of £85,000 then you don’t need to pay VAT. However, if you do exceed this threshold, VAT will need to be paid quarterly. There is a range of ways you can pay for your VAT bill, as long as they’re all processed through HMRC.

 

You are able to reclaim VAT that you pay on business expenses, such as for tech devices, equipment, and stationery supplies. To do this, you will have to submit a VAT return form to HMRC. VAT returns need to be submitted to the HMRC within 37 days of the end of the tax-year quarter or you will be penalised. 

 

While tax planning can be overwhelming and disorientating, it is critical to polish your financial management to stay on top of deadlines and dodge penalties. However, we understand running a business is already a handful. With Wilkinson Accounting Solutions, you can take advantage of our chartered accountants to manage your business accounts for you. Our service will give you confidence your accounts are being prepared by experts, with professional bookkeeping so you’ll never miss a tax deadline. 

Conclusion

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