How is a Business taxed?

How do I decide whether to trade as a Sole Trader or as a Company?

Your own individual circumstances will dictate whether you should operate as a limited company or as a sole trader. In addition to the taxation issues you need to consider there are various other practical and legal matters which should be taken into account when setting up a company and on which you should seek professional advice.

How is a Sole Trader taxed?

Self-Assessment System

Income Tax is payable by individuals on income earned in the tax year. As a self-employed person you are responsible for paying your own tax through the Self-Assessment system. The tax year begins on 1 January and ends on 31 December.

Self-Assessment gives you greater control and responsibility over your tax affairs. It applies for Income Tax purposes to:

  • Self-employed people (i.e. people carrying on their own business including farming, professions or vocations).
  • People receiving income from sources where some or all of the tax cannot be collected under the PAYE system, for example: profits from rents, investment income, foreign income and foreign pensions, maintenance payments to separated persons, fees, profit arising on exercising various Share Options/Share Incentives.

Pay & File System and Preliminary Tax

The Pay and File system provides the facility for you, on a single due date – 31 October, to:

  • Pay your Preliminary Tax for Income Tax purposes for the current year,
  • File your tax return for the previous tax year for Income Tax and Capital Gains Tax, and
  • Pay any balance of Income Tax due for the previous year.

The due date of 31 October is also known as the 'specified return date'.

Further information is available at Pay & File System and Preliminary Tax

For more detailed information:

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How is a Company taxed?

Corporation Tax

Companies pay Corporation Tax. on the company's profits which include both income and chargeable gains. A company's income for tax purposes is calculated in accordance with Income Tax rules. Chargeable gains are calculated in accordance with Capital Gains Tax rules.

There are two rates of Corporation Tax:

  • 12.5% for trading income
  • 25% for non-trading income

Further information on Corporation Tax is available at: Taxes & Duties/Corporation Tax.

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