5 Taxes and insurances
Tax and insurance are important business issues that you can’t ignore.
As a sole trader, your main taxes are income tax, which you’ve already looked at in Section 2, and National Insurance contributions (NICs). There are two categories of NIC which apply when your income exceeds a certain level:
- Class 2, currently payable at a weekly rate of £3, and
- Class 4, payable as a percentage of your profits.
Both will be calculated and paid as part of your annual self-assessment process.
If you run a limited company – your key tax payment will be corporation tax which, at the time of writing, is at a rate of 19%.
There are two other business taxes you may also need to be aware of, whether you are a sole trader or limited company:
- Value added tax (VAT) – If your turnover exceeds the VAT threshold (currently £85,000 a year), you will need to register for VAT. Or you can register voluntarily below that threshold if it suits your business. You then charge your customers VAT (where relevant) and pay it to HMRC. In turn, you can reclaim the VAT you pay on the goods and services you buy.
- Business rates – these are taxes charged on most non-domestic properties, e.g. shops, warehouses, galleries and workshops.
Charities don’t pay tax on most types of income as long as they use the money for charitable purposes.
For HMRC, social enterprises are treated the same as limited companies for tax purposes, but there are some reliefs available.
To find out more about taxes, visit the Gov.uk site and search for the tax you wish to research. See Further research for the link.
You’ve learned about the advantages of a limited company in protecting you from some financial risk, but another protection against risk comes from business insurance. There are various business insurances that you may need to consider in order to protect yourself and your business from problems that might arise (Box 2). The type of insurance you require depends on the type of business that you are setting up.
Box 2 Different types of business insurance
Simply Business (no date) lists the following common types:
Professional indemnity – important if your business gives advice or offers a professional service to other businesses, or if you deal with client data or intellectual property. If you make a mistake in your work and your client loses money and sues you, your professional indemnity insurance can cover the compensation claims and legal costs.
Public liability – a key consideration if your business comes into contact with members of the public, whether that’s at your premises or elsewhere. It can protect you against compensation claims for injury or damage made by clients, customers, suppliers, or other third parties.
Employers’ liability – if your business employs staff, you’re legally required to have an employers’ liability insurance policy. This covers compensation claims made by a member of staff because they’ve suffered injury, illness or damage as a result of their work.
Business buildings – whether you work from home or have separate business premises, business buildings insurance should be a priority.
Business contents – you can also protect the contents of your business premises, your business equipment and tools. If these are damaged, destroyed, lost or stolen, this cover will pay the cost of replacements or repairs. Note – if you work from home, your home contents policy is unlikely to automatically cover your business possessions. However, it is possible to arrange an extension to the cover by contacting your insurer.
Stock – if you hold any stock, whether on your premises or in storage, stock insurance will cover the cost of replacing it if it’s damaged, destroyed or stolen.
Product liability – protects you should a customer of yours suffer damage as a result of a faulty product you provide. You may be held liable for damage even if you didn’t manufacture the product.
Personal accident – covers serious injury or death caused by an accident. It can pay out for lost income, medical costs and hospitalisation, up to the limit of the policy.
Business interruption – if your business is disrupted by material damage caused by an event such as a flood or fire, business interruption insurance provides you with the financial cover you need to get back on your feet.
Business legal protection – covers your commercial legal expenses and provides protection against the potential costs of legal action brought by or against your business.
Income protection insurance – replaces a proportion of your lost earnings (usually up to 70% of your gross income) if you have to take time off work due to illness or injury. The policy pays you a monthly income so you are able to keep up with all your essential outgoings.
As you can see, the only compulsory insurance is employers’ liability cover if you employ staff. However, if you are attending public events to promote your work, the venue or organisers might insist on public liability insurance.
That’s a long list of options, so in Activity 5 you’ll spend a short time thinking about which one(s) you might need.
Activity 5 What insurance might you need?
Take a few minutes to consider the insurances that you might need to support your business idea and list them in the box below.
You won’t need all of those outlined, so the ones you list will depend on your business offer. For example, if you are a sole trader who doesn’t employ staff, you won’t need employers’ liability insurance or, if you don’t have any stock, you won’t need to insure it against loss or damage.
However, if you are touring a theatre show around the country, or in rehearsals for a performance or public event, you will need public liability insurance.
As long as they are used strictly for business purposes, you can claim any business insurance as an allowable expense on your tax return.