Deciding to trade as a sole trader, partnership or limited company maybe influenced by the amount of tax your business could be liable to.

Sole traders and partnerships pay income tax on the profits of the business. Each partners Drawings are not taxed. However the taxable profits of the business are arrived without a deduction for drawings, this means that all the profit from trading without deducting your own wages (drawings) is taxable.

Income tax rates are currently:

Basic rate        £0 - £35,000                20%

Higher rate      £35,001 - £150,000     40%

National insurance is payable as Class 2 and Class 4:

Class 2             £2.50 per week            £150 per annum

Class 4             9% on profits between £7,225 and £42,475 &

Class 4             2% on profits above £42,475

A taxable profit of £60,000 for a sole trader would cost in the region of £20,000 in Tax and National Insurance.

Limited companies pay corporation tax on the profits of the business. Each directors salary is subject to PAYE and NIC. However the taxable profits of the business are arrived at after a deduction for your directors salary.

With the same profits of £60,000 then deducting a Directors salary of £30,000 the Corporation Tax, PAYE & NIC would cost in the region of £16,000. 

No one wants to pay more tax than they need to. If it is a concern for you a meeting to discuss the consequences before you set up the business is essential.

All businesses must register for VAT once their turnover reaches £70,000 in any given twelve month period. 

With various methods of paying the VAT over to HMRC such as cash accounting, annual accounting, the flat rate scheme and retail schemes, it is essential you take advice on the best way to structure your VAT scheme. 

Choosing the right scheme can help your cash flow which we know is particularly import for new businesses.

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