While being employed full time, many people in the United Kingdom have decided to start their own business which they run on the side. They focus on work during the day and shift to their business when their shift ends. They also spend time on their business on the weekend. Doing this is possible if people are really interested in doing so. However, they should also know about the tax implications.
People get into this set-up because they want to have additional income. However, they should also be aware of the important things that come with doing such. Tax implications are one of those.
How does one register the business
To register a business (small or big), one must inform the HMRC and this is the first thing that they should do. Those who chose to be sole traders should register using this link.
People who have chosen to go with a limited company should register with Companies House. They can do so directly with Company House or through an accountant. A formation agent can also help them do that. Companies House will then notify HMRC about the company for registration and its status.
Should the business be paying salaries to the owner or to its staff, it should be registered as an employer. HMRC must know about this as this means that the person registering the business would also be its director. As a director, that person would then be subjected to a Self Assessment.
How are tax returns filed
Employees usually do not fill out tax returns. However, once they own a business, they have to do it. An individual must indicate the total income they get. There is a part for employment where they would be asked to indicate details of their salary, the benefits, and repayment of expenses that they got while employed.
In a limited company, an individual must fill out another page where information of their salary from the company, benefits, and expenses reimbursed must be provided. Sole traders would fill out a page on self-employment information.
What is the second tax code
Employers use the tax code when deducting income tax from monthly wages. This code tells employers just how much should be taken as tax basing on the PAYE scheme. The code is from the HMRC and depends on an individual’s circumstances.
Limited company owners who get a salary would use a second tax code from the HMRC, and it is used solely for salary received from the company. The original tax code from being an employee would include any personal allowances. The second tax code will not include that.
Sole traders only use one tax code. Taxes will be based on the business’ profits. It does not affect the tax code from employment.
Is there extra payment for National Insurance Contributions
Employees pay NIC under class 1 straight from their wages. The amount is deducted and then paid by their employer to the HMRC.
People who own limited companies still need to pay their employees’ NIC class 1 from their salary should they go higher than the primary threshold. The company pays additional NIC that is higher than the secondary threshold.
Sold traders pay two types of NIC. The first is a flat rate under class 2 NIC. If the profits do not reach the tax year’s limit, that person can apply for class 2 NIC exemption. This doesn’t affect their right to State Pension and other benefits since they’re still paying class 1 NIC.
Class 4 NIC must be paid from a business’ profits. Exemption can be applied if an individual is paying enough under class 1 NIC from their salary.
Getting to know these can help people learn more about taxes. It allows them to know the right way to pay their taxes if they own a business while being employed full time. Starting a business may seem a lot but companies like Company Address can help with company formation.
published under Business Address Guides
