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Tax Insider Tip: Choose Which Taxes You Pay

19th Dec 2014
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The choice of business vehicle will also determine which taxes are paid by your business. Sole traders and partnerships pay income tax on their profits, whereas a limited company pays corporation tax. However, there may also be income tax to pay on profits extracted from a limited company and where those profits are extracted in the form of a salary or bonus, Class 1 NICs.

Gains realised by individuals are liable to capital gains tax, whereas a company pays corporation tax on chargeable gains (other than certain gains on certain high-valued residential properties).
All businesses with turnover of VAT taxable goods and services above the VAT registration threshold (£81,000 from 1 April 2014) must register for VAT. All businesses with turnover below this level can choose to register if they wish, but this is not compulsory.

A sole trader and an individual partner in a partnership are self-employed and pay both Class 2 flat rate National Insurance contributions and Class 4 contributions on their profits.

Companies do not pay National Insurance on their profits but must pay employer contributions on payments of earnings made to employees.

By choosing the structure for your business, it is also possible to choose which taxes you pay.

Example:
Richard wants to set up a business. Having considered the options, he decides that being a sole trader is the right decision for him.

Richard will pay income tax on any profits from his business. His income tax liability will depend on his total income from all sources.

He will pay capital gains tax on any capital gains made from the sale of business assets, etc.

He will also need to register for Class 2 National Insurance contributions and will also pay Class 4 contributions on his profits.

If his turnover exceeds the VAT registration threshold he must also register for VAT. If his turnover is below this level, he can register voluntarily as this will allow him to recover any VAT suffered, although he must also charge VAT on any VATable supplies that he makes.

 

This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.

Click here to receive a free copy of this tax saving guide today!

 
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