Taxes are always going to be a key feature when running any kind of business. As a small business owner in the UK, you will need to pay tax on your profits. The amount of tax you pay will depend on how much profit your business makes and what kind of taxes apply to your business.
When you’re a new entrepreneur in the UK, setting up a new business or moving an existing business to the UK will naturally bring up a lot of tax-related challenges and questions.
It might feel stressful to think about all things tax-related while at the same time establishing your company, but this blog post is here to help you out! by providing an overview of the main taxes that small businesses in the UK might be required to pay. So let’s dig in!
İlayda Birol
Types of taxes you need to pay as a small business
Below is a list of 6 different types of taxes that you might need to file as a small business owner in the UK:
- Corporation Tax: This is a tax on the profits made by limited companies, and must be filed through a corporation tax return.
- Value Added Tax (VAT): This is a tax on the sale of goods and services, and must be filed through a VAT return.
- Pay As You Earn (PAYE) and National Insurance Contributions (NICs): If you have employees, you will need to file and pay these taxes, which are calculated and deducted from your employees' pay.
- National Insurance Tax: This is a tax in the UK that is collected by HM Revenue and Customs (HMRC) to provide certain benefits and services to individuals, such as the State Pension and other contributory benefits.
- Income Tax: This is a tax on the profits made by self-employed individuals, and must be filed through a self-assessment tax return.
- Business Rates: If you own or rent commercial property, you may be required to pay business rates, which are a form of property tax.
You need to know what taxes apply to your business and make sure you’re filing and paying them correctly. You can do this by checking with HM Revenue and Customs (HMRC) or by getting advice from a tax professional. Let’s get into a bit more detail on all the different types of taxes below.
Corporation Tax
Corporation Tax is a tax on the profits made by limited companies in the UK. It is calculated on the company's taxable profits for a given accounting period.
The current rate of Corporation Tax in the UK is 19%. However, this rate is scheduled to increase to 25% in April 2023.
To calculate Corporation Tax, companies must first calculate their taxable profits. This involves deducting allowable expenses from their total profits, such as wages, rent, and other business expenses.
Once the taxable profits have been calculated, the company must file a Corporation Tax return and pay the tax owed to HM Revenue and Customs (HMRC). The return must be filed within 12 months of the end of the company's accounting period, and the tax must be paid within 9 months and 1 day of the end of the same period.
Unlike income tax, corporations do not have personal allowances. All profits must be taxed.
There are penalties for late filing and payment of Corporation Tax, so it's crucial to keep accurate records and file returns and payments on time. If you are a limited company, it's also important to be aware of the impact of Corporation Tax on your business's finances and to plan accordingly.
This could include setting aside funds in advance to pay the tax bill later, or exploring ways to minimise the tax liability, such as claiming all eligible expenses and taking advantage of any tax reliefs and allowances available.
How to pay Corporation Tax
In the UK, limited companies are required to pay Corporation Tax to HM Revenue and Customs (HMRC). Each year, you'll need to submit a CT600 form to HMRC (also known as a company tax return) which includes details of your company's taxable profits, as well as other financial information. The CT600 form must be submitted within 12 months of the end of the company's accounting period.
Along with the CT600 form, companies may also need to provide supporting documents, such as financial statements and receipts for expenses. Make sure to keep all of these receipts and documents in case you’re asked to provide them.
There are penalties for errors and inaccuracies when submitting the CT600, so it’s important that all your information is accurate and complete.
Different methods available to pay your taxes include:
- Online through the HMRC website
- By phone using a debit or credit card
- By sending a cheque or postal order to HMRC
- Direct Debit to automatically pay Corporation Tax on a specified date
Laine Redpath
Value Added Tax (VAT)
Value Added Tax (VAT) is a tax on the value added to goods and services during the production process in the UK. It is a type of indirect tax that is added to the price of goods and services when sold to the final consumer.
In the UK, VAT is charged at different rates depending on the type of goods or services sold. The standard rate of VAT is 20%, while some goods and services, such as children's car seats and energy-saving materials, are subject to a reduced rate of 5%. Other goods and services, such as books and healthcare, are exempt from VAT.
Small businesses with a taxable turnover of £85,000 or more per year are required to register for VAT and charge VAT on their sales. Small businesses with a taxable turnover of less than £85,000 per year can register for VAT voluntarily but are not required to do so until 31st March 2024.
To calculate and pay VAT, businesses must keep accurate records of their sales and purchases and submit a VAT return to HM Revenue and Customs (HMRC) on a regular basis, usually quarterly. The VAT return must include details of the VAT charged on sales, the VAT paid on purchases, and any VAT owed to HMRC.
Laine Redpath
How to pay Value Added Tax (VAT)
Businesses must submit a VAT return to HM Revenue and Customs (HMRC) on a regular basis, usually quarterly. The VAT return must include details of the VAT charged on sales, the VAT paid on purchases, and any VAT owed to HMRC.
If the VAT owed is more than the VAT paid on purchases, the business must pay the difference to HMRC. If the VAT paid on purchases is more than the VAT owed, the business can claim a VAT refund from HMRC.
VAT payments can be made online through the HMRC website, by direct debit, or by cheque. Businesses that expect to owe more than £1,000 in VAT per quarter must make payments using the direct debit scheme.
It's also important to note that it is now mandatory for VAT-registered businesses to use Making Tax Digital (regardless of your income) – this involves keeping digital records of VAT transactions and submitting VAT returns through compatible software. This initiative was introduced by HMRC to improve the accuracy and efficiency of tax reporting and is part of a broader effort to digitise the UK tax system.
Pay As You Earn (PAYE)
Pay As You Earn (PAYE) is a system used by HM Revenue and Customs (HMRC) to collect Income Tax and National Insurance contributions from employees in the UK.
As an employer, it is your responsibility to deduct the correct amount of tax and National Insurance contributions from your employees' salaries and to send this money to HMRC on their behalf. This process is known as "operating PAYE."
To operate PAYE, you must register with HMRC and obtain an Employer PAYE Reference number. When calculating the amount of tax and National Insurance contributions to deduct, you will need to take into account the employee's taxable income, including salary, bonuses, and other benefits, and any tax allowances and reliefs they are entitled to.
The PAYE system operates on a cumulative basis, which means that the amount of tax and National Insurance contributions due is calculated based on the total taxable income earned by an employee over the course of a tax year, which runs from 6 April to 5 April.
Below you can find the Income Tax Rates & Salary Bands for your reference:
- Personal allowance: 0% on taxable income up to £12,570
- Basic rate: 20% on taxable income up to £50,270
- Higher rate: 40% on taxable income between £50,271 and £150,000
- Additional rate: 45% on taxable income over £150,000
National Insurance Tax
National Insurance Tax in the UK is collected by HM Revenue and Customs (HMRC) to provide certain benefits and services to individuals, such as the State Pension and other contributory benefits.
National Insurance is paid by employers on expenses and benefits they provide to employees under Class 1A and 1B. Over the period of 6 November 2022 to 5 April 2023, the expense and benefit rate will be 14.53%.
As an employee, National Insurance contributions are deducted from your salary, along with Income Tax, through the Pay As You Earn (PAYE) system.
As an employer, you are responsible for deducting National Insurance contributions from your employees' salaries and for paying your own contributions if you are self-employed.
There are different classes of National Insurance contributions, depending on your employment status and earnings. The current National Insurance rates are:
- Class 1 contributions: 12% of earnings between £190 and £967 a week (for employees) and 13.8% of earnings between £967 and £9,568 a week (for employers).
- Class 2 contributions: £3.15 per week (for self-employed individuals with profits over £6,725 per year).
- The rate of national insurance for class 4 is 9.73% until profits reach £50,270 on profits exceeding £11,908 per year.
Income Tax
Income Tax is a tax levied by the government on an individual's taxable income. It is calculated based on the amount of income earned in a financial year and is used to fund various government expenditures, such as healthcare, education, and infrastructure.
The amount of Income Tax you pay will depend on your tax band. It is important to keep in mind that other income sources, such as dividends, savings interest or capital gains, may also count against your income, pushing you into a higher tax bracket.
For a director, income tax goes beyond PAYE contributions, you’ll also need to keep a check on:
- Self-employed income
- Employment earnings
- Dividend income from the company's profits
- Any other taxable income such as rental income, savings, and investments
- Job benefits
- Rental income
- Trust income
- Interest on savings (in some cases)
In the UK, the Income Tax rate is determined based on the amount of taxable income an individual earns in a tax year. There are different tax bands and rates, with the tax rate increasing as the amount of taxable income increases.
How to pay Income Tax
Income Tax can be paid through the Pay As You Earn (PAYE) system if you are an employee and have Income Tax deductions taken from your salary. If you are self-employed or have other taxable income, you need to file a Self Assessment tax return and pay the tax owed to HM Revenue and Customs (HMRC) by the deadline, which is usually 31st January following the end of the tax year. You can pay Income Tax online through the HMRC website, or by sending a cheque or postal order to HMRC.
What is the average small business tax rate?
The average small business tax rate depends on various factors such as the legal structure of the business, the type of business, the location of the business, and the level of profitability of the business.
In general, small businesses in the UK are taxed at the standard Corporation Tax rate of 19%. However, small businesses with profits below £50,000 may be eligible for the Small Profits Rate, which will remain the same. However, the taxes are set to increase to 25% from April 1, 2023, to profits over £250,000.
It is important to note that the specific tax rate for a small business may differ depending on the unique circumstances of the business.
Specific taxes for different types of businesses
Taxes for Sole Traders
As a sole trader, your tax-free personal allowance is £12,750. If you are earning less than this amount, you would not be paying tax. Income tax is payable on your profits after subtracting your personal allowance, business expenses and capital allowances. The rates for the 2022-2023 tax year are as follows:
- Basic rate: 20% on taxable income up to £50,270
- Higher rate: 40% on taxable income between £50,271 and £150,000
- Additional rate: 45% on taxable income over £150,000
Sole traders are also required to pay Class 2 and Class 4 National Insurance contributions if their profits are over £6,725 per year. However, they do not need to pay corporate taxes.
Taxes for Limited Companies
All Limited Companies must pay 19% of their profits in corporation tax. They are required to send Companies House an annual return (known as a Confirmation Statement) and file annual accounts, which must include a tax computation and balance sheet, among other things.
Limited Companies must also register for VAT if their turnover exceeds the current threshold, currently £85,000. Additionally, company directors and employees must pay Income Tax and National Insurance contributions through the Pay As You Earn (PAYE) system, as appropriate. The company must also deduct and pay employer National Insurance contributions on behalf of its employee.
Taxes for partnerships
Partnership has similar tax obligations to that of sole traders. Partnerships consist of two or more people who run a business together and share profits and losses between them. Each partner pays Income Tax and National Insurance on their share of the Partnership's profit, after deducting any expenses they are entitled to.
The Partnership must also register for VAT if its turnover exceeds the current threshold, currently £85,000. The partnership is required to file annual accounts with HMRC showing how much each partner has earned and paid tax on.
However, partnerships do not have a separate legal identity and therefore do not pay corporation tax.
Laine Redpath
Taxes for limited partnerships and limited liability partnerships
Limited partnerships (LP) and Limited Liability Partnerships (LLP) have different tax obligations in the UK.
Limited Partnerships (LP) are considered to be unincorporated businesses and partners are taxed on their share of the profits in the same way as sole traders. Each partner must register with HM Revenue and Customs (HMRC) and complete a Self Assessment tax return, reporting their share of the partnership's profits.
Limited Liability Partnerships (LLP) are considered to be separate legal entities from their partners and must register for corporation tax. They are required to file an annual return to Companies House and pay corporation tax on their profits at the rate of 19%. However, the partners in an LLP are not taxed on the profits of the business, but on any salary or dividend payments received from the LLP.
Business Rates
Business Rates, also known as Non-Domestic Rates, are a tax on the occupation of commercial properties in the UK, such as shops, offices, factories, and warehouses. The tax is calculated based on the rateable value of the property, which is assessed by the Valuation Office Agency (VOA).
Business Rates are collected by local councils and are used to fund local services such as waste collection, street lighting, and public transportation.
The amount of Business Rates payable depends on the rateable value of the property and the local multiplier, also known as the Uniform Business Rate (UBR).
Businesses can apply for relief on their Business Rates, such as small business relief, rural rate relief, and charitable relief if they meet certain criteria.
A little more about small Business Rates relief
The small business rates relief It is a scheme in the UK that provides support to eligible small businesses by reducing their Business Rates bill. If your property's rateable value is less than £15,000, you may be eligible for 100% relief. If your property's rateable value is between £15,000 and £51,000, you may be eligible for tapered relief, with the amount of relief reducing as the rateable value increases. To be eligible for small business rates relief, you must occupy the property and use it solely for business purposes.
Other reliefs available for small businesses include Rural Rate Relief, Charitable Relief, and Discretionary Relief. It's important to note that these reliefs are subject to change and eligibility criteria may vary depending on the local council.
Laine Redpath
We hope this blog post has uncovered some of the mystery and removed some of the stress around all the different taxes you might need to pay. Taxes are an important aspect of running a small business in the UK and the different types of taxes, their requirements and deadlines, and how they apply to your business can help you stay compliant and avoid any penalties. By being aware of the various taxes and their implications, you can effectively plan and manage your finances to ensure the success of your business.
