Whether you are starting a business as a partnership, a limited company or aim to be self-employed - you must register with HM Revenue and Customs. After registering you will receive a Self-Assessment tax return annually. This allows HMRC to assess your liability for tax. It is your own responsibility to keep business records that will allow you to correctly complete your tax returns and pay your National Insurance contributions. To do this it is essential to keep at least a balance sheet (a summary of finances covering assets, liabilities and ownership equity), and a profit and loss account (showing revenues and expenses).
Since the start of the 2013 tax year there have been two ways to record your business income:
Cash basis is only suitable for small businesses and has its benefits. For example, you would not have to pay income tax on money that is owed to them.
After receiving your annual Self-Assessment, HMRC will be able to calculate how much you are liable to pay in Income Tax. Earnings, interest on savings, pension and rental income, as well as dividends are all examples of taxable income. It can be possible to reduce your income tax bill with tax allowances and reliefs. For example - married couples enjoy tax allowances or you may be eligible for relief on some of your expenses.
When self-employed you must also pay your own National Insurance contributions. These payments contribute towards things like benefits which help the unemployed, retired or those in need of health care. The size of contributions is also calculated in the Self-Assessment tax return but it is dependent on the scale of your earnings.
If your business turnover is over £79,000 you must register for Value Added Tax (VAT). Once VAT registered you complete a quarterly VAT Return that calculates the difference between VAT you have charged to customers, and VAT you have paid on purchases. If you pay more VAT than you have received then you are eligible to claim back the difference from HMRC. As well as this, if the tax you have received from customers exceeds what you have paid on purchases, then you must send the difference to HMRC with your tax return.
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