What business taxes do small businesses have to pay in the UK?
All businesses in the UK will be subject to a range of taxes. Some will be relevant to individuals and others will apply to the business entity itself. The taxes for which you will be liable will differ, depending upon whether you run a limited company, a sole tradership, a limited liability partnership (LLP) or a partnership.
Getting it wrong when it comes to reporting and paying taxes can cost you financially, and it may also lead to more serious penalties, so it is important to understand your financial obligations.
As an individual, you will need to pay tax on your income. This will include:
- Money you earn from employment
- Profits you make if you’re self-employed, including any services you sell through online websites or apps
If you are operating as a sole trader, you will pay income tax on your business profits once that profit exceeds £12,500 (in 2019/2020), provided that you are under 75 and have no other income. This figure is based upon your personal allowance which is the income you can earn before you pay tax.
If you are running a limited company, you will need to pay income tax on any income or dividends that you take from the business. You may be an employee of the company even if you are also a director.
If you are also employed and are earning an income, either in addition to your business or as an employee of your limited company, you should be paying income tax on your salary. This will be deducted via PAYE (Pay As You Earn), collecting income tax from employees as they earn it.
If you are running a limited company, you must pay corporation tax on profits. However, you do not pay corporation tax if you are a sole trader. The corporation rate in 2019/20 is 19% of your company’s trading profits, investments or chargeable gains on assets the company has sold. The rate from 1st April 2020 will be 17%.
A reduced 10% rate of corporation tax, known as the Patent Box, is available for profits from intellectual property. This is an optional scheme and businesses are required to opt-in to benefit.
Every limited company must tell HMRC how much corporation tax it owes. You don’t get a bill for corporation tax so there are specific steps that you must take to work out, report and pay your tax, such as:
- Register with HMRC for corporation tax, keep accounting records and prepare a company tax return
- Pay any corporation tax or report if you have nothing to pay by your deadline which is usually 9 months and 1 day after the end of your accounting period
- File your company tax return by your deadline which is usually 12 months after the end of your accounting period
Business rates are a tax on business premises. Business rates are calculated based upon a property’s ‘rateable value’. The rateable value is deemed to be the property’s estimated open market value. The last VOA (Valuation Office Agency) revaluation came into effect 1 April 2017. This refers to estimated values as of 1 April 2015.
Regardless as to which type of business you run, if your VATable sales are above £85,000 a year, you’ll have to register your business for VAT and complete a quarterly VAT return.
There are 3 rates of VAT – standard, reduced and zero rates. Most goods and services are classed as standard rate, currently 20%. Goods charged at the reduced rate of 5% include domestic fuel and power, children’s car seats and mobility aids for people over 60.
Zero rated goods include children’s clothes and shoes, books, newspapers, the majority of goods exported to non-EU destinations and goods supplied to VAT-registered EU businesses.
It is worth noting that, at this time, there are specific rules on distance selling and selling goods through websites and apps to non-VAT registered EU customers. In the event that you go over the threshold, it may be necessary to register for VAT in that country.
Examples of this would include downloads or online courses, digital artwork or patterns. It is recommended that you seek professional advice if you are selling goods or services online in the EU as this is a complex area.
National Insurance Contributions (NIC’s) are often referred to as a tax. If you are a limited company director, you are liable to pay both employees’ and employers’ NI contributions on salaries above the threshold of £12,500 (in 2019/20). As an employee of your limited company, you pay Class 1 National Insurance Contributions.
As a sole trader you will pay Class 2 and Class 4 National Insurance Contributions. Class 2 rates are applicable to sole traders with a profit over £6,365 and are £3 per week. Class 4 rates are applicable when your profits are above £8,632 and are calculated as part of a self-assessment return. Currently, the rates are 9% on profits between £8,632 and £50,000 and 2% on profits over £50,000.
This is a summary of the principal taxes for small businesses in the UK. If you are starting out in business you may want to consider seeking professional advice as to your tax liabilities and responsibilities.