final payment is the balancing amount plus the class 2 NIC liability. Capital allowances When assets are purchased for the business, such as machinery, office equipment or motor vehicles, capital allowances are available. As with expenses, these are deducted from income to calculate taxable profit. The below allowances are available to both
Not all of the expenses that a business incurs are allowed to be deducted from income for tax purposes but most are. It is important that you keep proper and comprehensive business records so that relief may be claimed. Non-deductible expenses include those which are not wholly and exclusively for the purposes of the trade - client entertaining and private expenses of the sole trader are common examples of this. Depreciation is another type of expense which is not deductible from trading profits. Instead a tax-standardised version of depreciation, known as capital allowances, may be claimed (see later). Trading and property income allowances Trading and property income allowances of £1,000 per annum are available. Individuals with trading or property income below £1,000 do not need to declare or pay tax on that income. Those with income above the allowance are able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance. Cash basis for smaller unincorporated businesses An optional basis for calculating taxable profits is available to small unincorporated businesses. If an owner of a business decides to use the cash basis, the business profits would be taxed on cash receipts less cash payments of allowable expenses. This may be more simple for the business owner to calculate. In addition, as the individual is only taxed on income actually received, they will not be subject to income tax on amounts paid late until those amounts are actually paid.
The optional scheme requires an election by the business owner and is only available where the business receipts are less than £150,000. Businesses can stay in the scheme up to a total business turnover of £300,000 per year. Further details about the scheme: • Cash receipts include all amounts received in connection with the business including those from the disposal of plant and machinery. • Allowable payments include paid expenses but these still need to meet the existing tax rule of being wholly and exclusively incurred for the purposes of the trade. • Payments include most purchases of plant and machinery, when paid, rather than claiming capital allowances. • Interest payments are only allowed up to a limit of £500. Do get in touch if you would like us to consider if this optional scheme is appropriate for you and your business. Paying the tax The self-employed may have to pay tax and class 4 NICs three times a year, namely: • 31 January in the tax year • 31 July following the tax year • 31 January following the tax year. The first two payments are based on the income tax and class 4 NIC liability for the previous tax year (less any amounts deducted at source like PAYE) and the
unincorporated businesses and companies. Plant and machinery - Writing Down Allowances (WDA)
Plant and machinery purchased by a business is eligible for annual writing down allowances of 18% per annum for most plant and machinery and 6% per annum for certain expenditure which is ‘integral’ to a building such as air conditioning or water systems and other long life assets. These allowances are calculated on a reducing balance basis rather than straight line on cost.
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Running a Business
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