Tax & Insurance

Once your business is up and running, you will need to pay tax, National Insurance, business expenses and business insurance. Each of which is described below:

Tax
There are four main types of tax:

1. Income Tax
This is the percentage of a person's earnings or profit that is paid to the government after personal allowances have been made. The personal allowances depend on your circumstances, for instance whether you have children or a mortgage. You only pay tax on your income above your personal allowances. If you earn less than your personal allowance, you don't pay any tax.

When you start a business, you need to inform:

• The Inland Revenue National Insurance Contributions Office.
• Your local Tax Office.
• Customs and Excise, if your total sales figure is more than £50,000 in a 12 month period.
• Your Job Centre if you are registered with one.

You need to tell the tax office, that you have started a business within twelve months of the end of the tax year in which you start. The tax year runs from April 6 to April 5 of the following year. A self-employed person (someone who work for themselves on their own, or in partnership with one or more people) has to pay tax twice a year, on January 1 and July 1. The time you start your business can have an affect on the rules and time you pay your tax. It is best to get professional advice from your bank manager, accountant [see our Business Directory for a list] or the Inland Revenue.

Expenses and deductions
Income tax is paid on profits after certain deductions have been made. The deductions that you are allowed to make are for expenses paid in running the business. You can claim for running costs and overheads, but not for capital outlay and business expenses.

2 Corporation Tax
All limited companies must pay corporation tax. This is a percentage of the net profits the company makes.

3 National Insurance
Most employed and self-employed people pay National Insurance. This is the money that pays for benefits such as sickness benefit, pensions and child allowance. Employed people pay class 1 contributions; self-employed pay class 2 (flat rate payment) and class 4 on profits. If you have a job and work in your spare time as a self-employed person, you will have to pay class 1 and 2 contributions. The limited company has to pay part of any employees' contributions.

4 VAT
Value added tax is a tax which is added to the price (or value) of most goods and services when it is sold. The current rate is 17.5%. If your turnover exceeds £50,000 per year, you must register for VAT with HM Customs and Excise. However, you may find it a good idea to register for VAT even if your turnover is less. Your accountant would be able to advise. Every three months, you must submit the VAT you have collected to Customs and Excise, less any VAT you have paid yourself for business materials. Any VAT you have paid can be claimed back. You must keep receipts and records.

From April 2001, a number of measures will be introduced by the Government to make the administration easier for small, medium enterprise. There is also an increase in the threshold below which firms can use cash accounting, from £350,000 to £600,000. VAT returns will also be allowed to be done on an annual basis rather than a quarterly basis. This will mean another 8,000 businesses operating without the need to charge VAT.

For further more detailed information visit the Inland Revenue web site.

Business Insurance
There are two different categories of business insurance: compulsory and optional insurance to cover risks and disasters.

Compulsory insurance
Employers Liability - If you have employees [refer to: 'Employing Others?'] you must have Employer's Liability insurance in case one of your employees is injured or ill as a result of working for you and you have been negligent.

Plant Inspection - There is a statutory requirement for many items, you will need to contact the insurance broker [see our Business Directory for a list].

Motor Insurance - You will need motor insurance If you have vehicles that are used on a public highway.

Optional insurance
There is a range of insurance you can take out which covers such things as computer, legal expenses, against fire and other perils, loss of profits, goods in transit and loss of money. You will need to consider whether these insurance are worth getting. Use an independent financial adviser who is authorised to advise you on these topics.