Understanding Small Business Taxes

If you have your own business, it’s almost certain that you’ll be liable for taxes of some description.

But with so many complicated tax rules in the UK, it can be difficult to know exactly which ones apply to you or your business. Nicola Roby, Director at CHW Small Business Accountants in Bolton provides a simple overview of small business taxes.

Income tax

If you are a sole trader, income tax is paid on your business profit. Assuming you don’t have any other income, such as salary from an additional job, then you will start paying income tax on your business’s profit once it exceeds the personal allowance (£11,850 if you’re under 75).

If your business is a limited company, you could pay income tax on any salary or dividends you take. How much you pay depends on how much you take out.

Income tax is due on your salary if it’s over £11,850, you are under 75 and you have no other income. If you have another job as well as working for your own company then you may start paying income tax sooner.

If you’re paying income tax on your salary, your employer – in this case your own company, will deduct it from your salary under the PAYE scheme.

National Insurance (NI)

NI is not strictly a tax – it is money which is paid to the Government though, so it’s often classed as a tax in all but name.

Sole traders pay two kinds of NI. They pay a flat weekly rate of Class 2 NI, unless the business’s profits are under the Small Profits Threshold, which is currently £6,205.  Class 2 NI is £2.95 per week. You can still pay Class 2 NI voluntarily, if your profits are below £6,205 to protect your entitlement to State Pension and other benefits.

Once your business’s profits go over £8,424 you will also pay Class 4 NI which is worked out as a percentage of your business’s profit.

If the business is a limited company, and the company’s paying you a weekly sum of £162.01 or more, then it will have to deduct Class 1 employee’s NI from your wages and pay that over to HMRC.

Corporation tax

Limited companies pay corporation tax on profits. There’s no equivalent of the personal allowance, so as soon as a company makes any profit, unless it’s previously made losses, it will start paying corporation tax.

The rate is currently 19% for all companies, payable nine months and one day after the company’s accounting year end so, for example, a company with a year-end of 30th June will have to pay its corporation tax by 1st April.

VAT

No matter what the structure of your business, if you make VATable sales of more than £85,000 a year, you’ll have to register your business for VAT. VATable sales are goods or services that would have had VAT charged on them if made by a VAT-registered business. Standard rate VAT is 20% per cent but other rates can apply.

Business rates

If you operates from premises it is probable you will have to pay business rates. These are similar to council tax but for business properties. Some premises though are automatically exempt from business rates and others may be entitled to business rates relief.

If you run your business from home, you won’t usually have to pay business rates as well as council tax but there are some exemptions, for example if your property is part business and part domestic. An example could be that you run a pub and live above it.

For more advice about what taxes your business might be subject to and when you are required to pay them contact us at CHW by clicking here.


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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