If you are self-employed or you own a small business, you need to get used to dealing with taxation. This can be quite tricky since there are a number of things you need to learn about. One of the most essential aspects of getting your business taxation in order is all about understanding the difference between payroll and income tax. Here is a small guide to help you distinguish between these two and select the best taxation methods for your business.
What Do You Need to Know About Payroll?
If you own a small business that employs other people, then you are legally required to register for Pay As You Earn (PAYE) and pay your payroll taxes through it. PAYE is also essential for people who have set up a business, but don’t necessarily employ other people than themselves. If you have a business, either with employees or just with you as an employee, you will pay taxes through the payroll system.
The system underwent changes in April 2014 and businesses are now required to send payroll information electronically every time they pay an employee. The taxes that are involved in the PAYE system include National Insurance contributions as well as income tax. The system also covers the taxes on all of your employee benefits, such as health insurance payments. All of these payments and contributions are generally collected once a year.
You’ll need a professional service to operate a payroll program these days and therefore for a number of businesses it is a good idea to use professional payroll management. These can help your business save a lot of time as well as money. In addition, if your business only has nine or fewer employees it is possible for you to use HMRC’s Basic Payroll tools for calculating the taxes.
What Do You Need to Know About Income Tax?
On the other hand, income tax is the tax you pay on your income. If you are self-employed, but don’t own a business, you are required to claim income tax on your business earnings. For the majority of people, income tax is automatically calculated from their income through the PAYE system. But self-employed people need to claim their taxes each year through the self-assessment service. You might also be required to do this if you have additional income outside your day job.
So if you are self-employed, you’ll need to file self-assessment via the HMRC service. You can also get an accountant to help you out, which can be a good idea to ensure you don’t end up paying more than you need to.
In short, income tax is part of the payroll tax service. Depending on the size as well as the type of your business, you might be required to set up a payroll system to take care of your income tax contributions. If you only work on your own and don’t set up a business, you can just keep paying income tax through self-assessment.
If you are at all unsure, which service would be the best for you, it is a good idea to discuss the matter with a professional accountant. For a number of businesses, getting professional assistance with taxation can really guarantee the best financial results.