(Information for UK-domiciled merchants only.)
Where there is business, there will be taxes, whether the business is online or off. If you are taking an existing business online, you're probably familiar with most of this advice. If not, this is vital information when you're starting out.
Income tax is payable on your income from employment or self-employment. HM Revenue & Customs (HMRC) sets a tax-free allowance for you - you pay tax on the rest. The amount of income tax you pay on your business income depends on the amount you earn and the type of business:
There are a number of tax reliefs than can reduce the amount of income tax you pay; find out which you are eligible for and apply for them via the HM Revenue and Customs Website.
- Sole trader: you pay income tax on your business' profits rather than on the salary you pay yourself. You're responsible for paying your own income tax (and National Insurance - see below for more information) by filling in a tax return every year. Once you are registered as a sole trader, HMRC will automatically send you a tax return form that suits your particular circumstances.
- Limited company: as an employee you pay income tax on your salary, normally deducted automatically from your wage via the Pay As You Earn (PAYE) scheme. But as a director of a limited company, you'll also need to fill in an annual tax return. Business Link advice advice will help you with this. (A limited company also pays corporation tax on its profits - see below.)
See Tax Relief, below, for advice on reducing the amount of income tax you pay.
There are also a number of tax reliefs than can reduce the amount of income tax you pay - refer to Tax Relief for more information.
Corporation tax is not payable by sole traders and partnerships but is payable on the profits of limited companies. You pay corporation tax, in the country you live in, on your worldwide online trading profits. Anything you make money from can be taxed once you are making at least a few thousand pounds a year.
You are legally obliged to let HMRC know your company exists and that it is liable for corporation tax. You can do this on the HM Revenue & Customs website.
You don't want to pay more corporation tax than you need to - keep accurate records of your income and expenditure.
Many new businesses can reduce their tax bills by taking advantage of a number of tax allowances and reliefs. Tax reliefs aren't awarded automatically - you'll need to find out which you are eligible for and apply for them via the H M Revenue & Customs Website.
As your business is taxed on its profits, it's important to work out how much your business has spent as these costs can be deducted from the tax you pay. You should always keep receipts from any business purchases or expenses that you can offset against your tax payments - such as fitting your home office. Calculate your taxable profits at the HM Revenue & Customs website.
Many new businesses can reduce their tax bills by taking advantage of a number of tax allowances and reliefs.
Your business is taxed on its profits, so it's important to work out how much your business has spent, as these costs can be deducted from the tax you pay. Have you bought IT equipment for your business? Or stationery? A desk? Keep receipts from any business purchases or expenses that you can offset against your tax payments.
Calculate your taxable profits at the HM Revenue & Customs website.
Tax reliefs aren't awarded automatically - find out which you are eligible for and apply for them via the H M Revenue & Customs Website.
Most sole traders and the managing directors of limited companies must pay monthly National Insurance (NI) as well as tax to HMRC.
In exchange for NI contributions you'll most likely be eligible for certain benefits such as a state pension and Jobseeker's Allowance.
NI isn't one-size fits all: there are different types of flat-rate or wage-based contributions. Make sure you know what your correct NI payments should be. If you get it wrong, there could be a substantial bill and/or a penalty later on.
Have a look at National Insurance information.
VAT applies to most business transactions that involve the sale of goods or services.
Once your turnover passes a certain level you'll need to register (with HMRC) for VAT. Then you'll have to charge VAT on your sales and repay the VAT to HMRC.
The amount of VAT you charge on your sales depends on what you are selling and who you are selling it to. It's not that simple, but - fortunately - the HMRC website includes a comprehensive guide to VAT rates.
VAT is considerably more complex on purchases that are made outside the UK, depending on whether you are supplying goods or services to business or non-business customers, inside or outside the EU. If your business has not previously been involved in cross-border trading, speak to an accountant or tax adviser before you start.