Our startup guide to common tax terms
It’s tax return season, and what better time to brush up on your tax generally? It can feel complicated and daunting – but it doesn’t have to be. Here’s our cheat sheet of some of the main tax terms explained.
Income tax: Income tax is a tax levied on your earnings. You’re taxed at varying thresholds, depending on your income. If you’re registered as a sole trader, you’ll pay income tax – not corporation. Speaking of which…
Corporation tax: Corporation is a tax levied on your profits if you’re registered as a limited company. You pay corporation tax on money you make from trading, from investments, and from selling assets. SMEs and startups pay a slightly lower rate of tax, the small profits rate of 20%, if their annual profits are £300,000 or less.
VAT (Value Added Tax): Value Added Tax, or VAT, is an additional tax applied to your product or service if you’re registered for VAT. It’s a tax paid by your customers, and you can claim for VAT you have spent. Find out more about VAT here.
Gross profit: Gross profit is the company’s total revenue, minus the cost of goods sold.
Net profit: Net profit is the profit left after all other costs have been subtracted, including the cost of goods and the costs of running your business.
Assets: An asset is something owned by the business that can be converted into cash if sold off, such as property, equipment or land.
Capital gains tax: Capital gains tax is a tax on the profit when you sell an asset (see above) that’s increased in value. You’re not taxed on the total amount – you’re taxed on the gain that you make. You also get taxed if you give the asset away or swap it, or if you receive compensation for it (eg if it is destroyed).
Dividends: Sums of money paid out regularly (typically annually) by a company to its shareholders out of profits.
Limited company: A limited company is an organisation you can set up to run your business. If you’re registered as a limited company, the business’s finances are totally separate from your personal finances. Any profit a limited company makes is owned by the company (after paying corporation tax).
Sole trader: A sole trader is a person who is the sole owner of a business, and therefore entitled to keep all profits after tax. However, you’re liable for any debts or losses too.
PAYE: PAYE is the tax collected from the wages of your employees by HMRC, including sick leave, tips and bonuses. If none of your employees earn £112 or more a week, receive expenses and benefits, have another job or receive a pension, you’re exempt from PAYE.
Capital allowance: Capital allowance is an allowance you can claim when you buy assets that you want to keep in your business, such as equipment. You can deduct some or all of the value of the item from your profits before you pay tax.