Firstly decide on your business structure.
First of all, you will need to decide on your
business structure. Are you setting up just by yourself or with a friend? If you have a friend you want to run your business with, you will want to read my blog about the advantages of having a partnership because there are some things you will need to follow but also some advantages.
Before starting your business, you need to read my blog,
Starting a business in the UK, which will guide you through everything you need to know about registration with HMRC, what your next steps are, and how to set off to a good start.
What taxes does your online business need to pay?
If you earn more than £1000 from your hobby or a side hustle, you need to register with HMRC. The £1000 is what you get paid before you deduct any expenses. Suppose you are an online business selling services or goods through several platforms, such as eBay or Amazon. In that case, you will need to keep an eye on your income because tax evasion is a criminal offence, even from online sales and could land you a fine. It’s easier to avoid penalties, register with HMRC and pay taxes.
Income Tax
If you are trading as a Sole trader or partnership, you will be referred to as self-employed and have to pay income tax from your trading income and submit your Self-Assessment to HRMC.
If you are employed, and your online business is your side hustle, your employer will submit your taxes from your employment, which will appear in your HMRC account. You will then need to file your Self-Assessment tax return. The
“Making Tax Digital for Income Tax”
is coming in April 2024, and you will need to submit your taxes with HMRC-compatible software.
Dates to remember:
* Register by 5th October following the end of the tax year
* The tax year 2021/2022 runs from 6th April till 5th April
* Second payment on account – 31 July
One thing you should be aware of is, that the net profit for the financial accounts and the taxable trading profit is rarely the same figure because not all expenses in your accounts are allowable for tax deduction purposes. You can download the Allowable expenses guide in resources.
When working from home, it may seem you don’t have any expenses, but there is still quite a lot you can claim as an allowable expense. You can either claim your expenses at a flat rate or calculate your actual expenses, which can be more beneficial, but be careful to give reasonable estimates.
Whether you do your bookkeeping yourself or as a bookkeeper/accountant to help, you always ask for help if you are unsure.
National insurance
You will also have to pay
National Insurance contributions. These depend on your Class of contributions. If you are self-employed, a partner in a partnership or a director of a limited company, you will pay NICs on an annual basis. You will be able to earn £11.908 before paying Class 4 NICs.
You may be aware of some changes to National Insurance. The insurance has been increased by 1.25%, and the threshold has been brought up in line with the income tax personal allowance of £12570.
Class 2 is collected by HRMC through your Self-Assessment system. The payment is due on 31st January following the end of the year, same as your income tax and Class 4 NIC.
Please note that taxes payable to HRMC and the National Insurance contributions are NOT allowable expenses for your business!
VAT
Making Tax Digital for VAT
has been mandatory from 1st April 2022. You can voluntarily register for VAT and reclaim VAT on your purchases from HRMC unless the income from your trading is wholly Exempt from VAT.
You cannot charge VAT on your invoices or reclaim VAT unless registered with HRMC.
You will receive a certificate of registration and VAT registration number, which must be quoted on all your invoices. You will have to maintain VAT records in digital form and submit your VAT return. You will be given a tax period for filing your returns, usually every 3 months.
You can claim some VAT back from the period before your registration, but not all of the VAT is claimable. It is not completely simple, and I would recommend you ask an accountant for help because you can’t claim back everything, but at the same time, you want to claim as much as you can.
HRMC states you can reclaim VAT paid on goods and services bought before you registered for VAT if you purchased them within:
• 4 years for goods you still have or goods that were used to make other goods you still have
• 6 months for services.
You can only reclaim VAT on purchases for the business now registered for VAT, which must relate to your business purpose.
Corporation tax
• 9 months after your tax year-end to Companies house
• 12 months after your tax year to HRMC
You will have a letter from HRMC reminding you, and you can also check this information on the Companies House website.
As a director of a Limited company, you will have to submit two sets of accounts. One for your company and pay Corporation Tax and your Personal Tax return. Remember expenses for completing your Personal Tax return are your expenses and not expenses for your limited company, as legally, you are two separate entities.
Final thoughts
Starting an online business is exhilarating, but remember that
60% of new businesses fail
in their first year because of their finances and paying taxes. If you want your business to succeed, you need to keep up with your bookkeeping to keep HMRC happy and fully understand what your business is telling you.
You can predict what will happen with your business, how much tax you will need to pay when registering for VAT, and how much you will be earning in 5 months with management accounts. Don’t overlook doing your finances.
When you keep up to date with your business finances, you put yourself into a position of control and will be able to grow your business quickly. Treat your online business as your best and most important client; it will give you precisely what you want: freedom, certainty and profit.
Work with us,
and we will remove all the worries about finances and paying taxes for your online business.
