Personal Liabilities and Personal Taxation
“I believe the director’s primary role is to create an atmosphere where his company can be created.” – Charles Keating
In the UK, everybody who earns over the Personal Allowance (currently £11,500, but you can check rates on HMRC) must pay income tax. You also get a tax-free allowance for income relating to savings interest and dividends (if you own shares in a company).
How you pay tax depends on:
- If you’re a sole trader or partnership
- If you’re the director of a limited company
- If you’re an employee
If you’re self-employed:
Sole traders and company directors must complete an income tax Self Assessment each year and pay income tax directly to HMRC. To do this you must keep accurate records of your income and expenditure and then fill in the online form by 31st January (for the tax year that ends the previous April).
As a sole trader, you should also keep track of your expenses, such as materials purchased for work, rent, bills, professional fees etc. These are then deducted from your taxable profit and you pay your income tax on the remainder.
As a director of a limited company, you also have to register for a Self Assessment Tax return, but in this case, you pay income tax on the money you have drawn as a salary from the company.
In both cases, for a sole trader and director of a limited company, your National Insurance Contribution is covered in your self assessment, but if you employ other people, you have to make an Employer’s National Insurance Contribution too.
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Employing other people:
As your business grows and you begin to take on staff, many aspects of your business will become more complex. There are more managerial details to consider relating to the wellbeing of your staff, such as employment law and health and safety. You’ll also need to think about certain financial aspects; from payroll and PAYE, through to Employer’s Liability Insurance and workplace pensions.
Taxing your employees
When you start taking on staff, you’ll need to set up a payroll system, which you can do yourself or with the help of an accountant. Like with your accounts, you need to keep accurate records of your payroll and submit them to HMRC. Employees are taxed “at source” via the Pay-As-You-Earn scheme (PAYE), so their Income Tax and National Insurance Contributions are taken from their wages directly. There are other deductions that can be taken from staff wages directly, such as Student Loan Repayments and Child Maintenance.
Since the new law regarding workplace pensions has come into force, employers must automatically enrol their staff into a pension scheme. As an employer, you’ll have to set up an auto-enrolment scheme and include your eligible staff. You should then write to your staff explaining how auto-enrolment applies to them and detail the contributions you will make towards their pensions. The current minimum is 1% employer contribution, along with a 1% employee contribution deducted from their monthly pay. This will increase from April 2018, so that the employee must increase their contribution to 3% and the employer pays 2%. The government will also contribute to your employees pensions by providing tax relief on their payments.
For more information about personal tax liabilities for yourself and for your employees, we strongly recommend speaking to an accountancy professional for advice.