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Tax Implications to Consider When Starting a New Business

It has always been the custom that any business activity that generates income attracts tax. The amount payable and the type of tax will depend on a variety of factors, the main ones being the amount of revenue collected, the nature and the legal status of the business. If you have no idea where to start, tax accountants will help you find your footing.

All UK businesses are required to pay taxes on their net profit. This tax could either be income or corporation. If you wish to start a sole proprietorship or a simple partnership, the income generated by the business is part of the owner(s)’s personal income. This personal income is subjected to income tax. On the other hand, if the business operates as a registered company, then the income is the company’s own and is subject to corporation tax.

In addition to corporation and income taxes, which are on profits, a business should also pay value added tax on the products it provides, as well as national insurance. Businesses that are operated in the international environment are subject to more taxes and duties depending on the nations they trade with. For imports and export outside the EU (European Union), the business/company attracts custom duty.

Types of Tax Obligations for Start-Ups

Income Tax

This refers to the tax levied on personal income from sole proprietorship and partnership businesses. The amount taxable is usually the gross earnings less all expenses and other deductions. The resulting net profit is the amount that is liable for this tax.

The income tax rates are dependent on the amount of net profit realized.

·         20% for income up to £37,400

·         40% for income up to £150,000

·         50% for income over £150,000

However, for those individuals whose income is £100,000 or less a personal allowance/tax free amount is given.

To determine how much you need to pay as income tax, every individual undertakes a self assessment through annual tax return files. Every business owner should be registered with HM Revenue and Customs. The HMRC also helps in setting up the National Insurance to be remitted and maintains the records.

Corporation Tax

This is the tax that is levied on the taxable income of limited companies. The corporate taxes are also in categories as follows:

·         28% for 2010

·         26% for 2011

·         25% for 2012

·         20% for companies making less than £300,000

Startup companies are required to fill the CT41G form which should be submitted to that Tax Office. This form is used to give details of the new company, and it should be submitted within 3 months of incorporation. If the company has been registered but is yet to start trading activities, then a Dormant company form (which is insert the CT41G form) should be filled.

Value Added Tax and Duty

All businesses that provide value added products attract VAT. Most B2B and B2C businesses usually result in the standard 20% rate.  However, the exact tax rate will depend on the item. Some items can attract as low as 5% while others are zero rated. Other items may be exempted from VAT while others do not attract the tax at all.

Startups are exempted from paying VAT unless their taxable income for the previous 1 year is more than £73,000.

For businesses that deal with imports and exports outside the EU, the products may be liable to import VAT and custom duty.

National Insurance and PAYE

National Insurance is contributions that should be remitted for all employees, whether self employed or you draw your salary from your own company. The rules governing the amount of contributions vary with the rates, though the contributions are likely to go high if the taxes payable are high.

Self employed people pay a flat rate (class2) regardless of the amount of profit realized and Class 4 contributions which as dependent on the taxable profit made. The standard contributions, however, are about 15% of the total earnings.

The National PAY system collects National Insurance from both employers and employees. Employers are required to pay Class1 contributions, same as employees.

Tax Reliefs and Exemptions

The law is very particular about tax payment and doesn’t differentiate between startups and already established businesses. However, new businesses have the benefit of a variety of benefits, allowances and reliefs. The government can scrap some taxes from time to time to encourage startups in different zones.

All startups in the 21 newly named UK enterprise zones or any business relocating its operations to one of those zones qualify for 100% tax exemption for the first 5 years. New businesses outside these zones qualify for smaller tax reliefs and exemptions.

Capital allowances are made to offer relief to businesses that pay corporation tax on electronics such as computers, vehicles, and furniture and business tools in the first business year. The enterprise scheme is a 20% relief from income tax for new ventures.

In Conclusion


In addition to the usual startup costs, taxes are a reality. It is essential to consider these requirements, fill the necessary forms and submit them to the relevant offices on time. Be ardent in finding loopholes on tax reliefs and exemptions so that you can take advantage of them.


Numerous Entrepreneurs have reaped benefits from our advice. Read their wonderful comments!

Cost Recovery has helped me to a very large extent by helping me create a realistic financial plan for my business. Prior to knowing about them, I was not very confident about taking the first step to start my own business!
By By Lucy Blake

Kudos to Cost Recovery and its entire team for posting such in-depth and thought-provoking articles and advice pertaining to business-finance. The articles are well-researched and therefore backed by ample statistics for the benefit of young entrepreneurs. 
By Kate Hyde
Robinson Furniture

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