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Guide to business tax
Business advice

Guide to business tax

30 June 2021

6 min read

Guide to business tax

How tax works for small businesses

“I’m really looking forward to completing my tax return,” said pretty much no one ever. Tax may not be fun, but knowing how tax works could make all the difference in helping you plan your business’s short, medium and long-term growth. In this guide we’ll explain how different types of taxes work to help you figure out how to pay Corporation Tax and other business related taxes.

How corporate taxes work

If you run a company, you’re likely to be liable not just for personal tax (such as Income Tax) but business taxes too. There are various types of small business tax depending on whether you’re set up as a limited company, sole trader or partnership. Read our guide to registering as self-employed for more information on how each legal structure works.

In the meantime, enjoy our whistle-stop tour of the different types of business tax:

Corporation Tax

Businesses have paid Corporation Tax in the UK since 1965. But how much is Corporation Tax today? Find out below.

Who has to pay it?

Corporation Tax is paid by limited companies, so you won’t be liable for this type of business tax if you’re set up as a sole trader or in a business partnership with other individuals. It also applies to foreign companies with a UK branch, and ‘unincorporated associations’ like clubs and co-operatives.

How much is it?

A limited company’s taxable profits are taxed at 19% under Corporation Tax (2021/22).. For companies with taxable profits of £250,000 or more, the Corporation Tax rate is set to rise to 25% by 2023/24 . For companies with taxable profits of £50,000 or less, the Corporation Tax rate will stay at 19%, but taxable profits between £50,001 and £250,000 will be taxed at a tapered rate.

How to pay it

Corporation Tax is generally paid 9 months and 1 day after the end of the company accounting period, and you or your financial representative (such as an accountant) should submit a Company Tax Return (form CT600) to HMRC .

Value Added Tax (VAT)

VAT has been around in the UK since 1973, replacing the previous ‘purchase tax’. VAT is a consumption tax which is applied to the sale of goods and services. Let’s take a closer look at how VAT works:

Who has to pay it?

Technically, a customer pays VAT when they make a purchase, but it’s VAT-registered businesses who are responsible for paying this money to HMRC. Your business will generally be obliged to register for VAT if your taxable turnover exceeds £85,000. This figure includes everything that you sell, other than products or services that are exempt from VAT.

How much is it?

The standard VAT rate is 20%, which is chargeable on most goods and services. You can read more about VAT rates on GOV.UK.

How to pay it

You can submit your VAT return online, which you’re normally obliged to do every three months.

Business rates

Does your business have a bricks ‘n’ mortar premises? Find out how business rates compare to other forms of tax.

Who has to pay it?

If you operate your company from a non-domestic property, such as a shop, warehouse or office, you’ll be liable to pay business rates.

How much is it?

Your local authority will base the amount charged on a building’s ‘open market rental value', which is calculated by the Valuation Office Agency. You can calculate how much you might pay in business rates on GOV.UK.

How to pay it

You can pay business rates directly to your local authority. Check your local council’s website; you may be able to pay by Direct Debit, telephone or BACS transfer, for example.

Income Tax

Income Tax is a tax on your personal income, but can cross over into the world of business.

Who has to pay it?

Individuals are generally liable to pay Income Tax on income above the tax-free Personal Allowance, which is £12,570 for 2021/22 . Your taxable income can also include money withdrawn from a business in dividends.

How much is it?

The general Income Tax rates are currently:

  • Basic rate – 20% on earnings between £12,571 and £50,270.
  • Higher rate – 40% on earnings between £50,271 and £150,000.
  • Additional rate – 45% on earnings over £150,000.

Different rates apply in Scotland and special rates apply to dividends.

You don’t pay income tax on dividends within your tax free dividend allowance (currently £2,000 per tax year) and any unused personal allowance. Dividend income above this will generally be taxed at 7.5% within the basic rate band, 32.5% within the higher rate band, and 38.1% within the additional rate band.

How to pay it?

If your earnings from dividends are above the tax-free dividend allowance, you will need to register for Self Assessment (if you haven’t done so already) and complete a Self Assessment tax return.

If you’re an employee your Income Tax should generally be deducted from your pay through a company payroll. If you’re self-employed or a limited company director, you pay Income Tax to HMRC by completing an annual Self Assessment tax return.

National Insurance

Businesses and their employees may benefit from getting a handle on how National Insurance works.

Who has to pay it?

Organisations that hire staff are generally liable to pay employer Class 1 National Insurance Contributions, while employees themselves generally pay employee’s National Insurance, which is deducted from their pay.

How much is it?

As an employer, you will pay employer Class 1 National Insurance rates of 13.8% on an employee’s income above £8,840 (2021/22). The Employment Allowance can reduce your liability by up to £4,000 per tax year.

How to pay it

You can pay employers’ National Insurance when you submit your PAYE bill. Read more about National Insurance rates on GOV.UK.

Capital Gains Tax

Not every business owner will have to pay Capital Gains Tax, but it may be worth familiarising yourself with this form of taxation. Companies pay Corporation Tax on capital gains realised on company capital assets.

Who has to pay it?

Individuals who sell capital assets worth more than £6,000 – with certain exceptions such as cars – may be charged Capital Gains Tax. This could include a property that you use for business purposes.

How much is it?

Individuals benefit from a tax free capital gains annual allowance (currently £12,300), whereas companies don’t. Those in the higher rate Income Tax band are taxed at 28% on gains from residential property, and 20% on gains from other ‘chargeable assets’. If you pay basic rate Income Tax, you would pay 10% on gains that fall within this tax bracket (rising to 18% for residential property). Read more on GOV.UK.

How to pay it

Before you pay Capital Gains Tax, you will need to work out your gain, deduct costs and apply any Capital Gains tax relief you’re eligible for. There is no simple answer regarding how much Capital Gains Tax a business might pay, but HMRC can help with general enquiries about Capital Gains Tax.

While we’re on the subject of how tax is calculated, you can also claim capital allowances on various items of expenditure that you use for business purposes. You can then potentially deduct some or all of the value of those items from your tax bill.

Additional guides on how tax works

We’ve published a fair few articles on how tax is calculated, and other pointers that could help you with money matters in general. Read more about small businesses and taxation:

Disclaimer

This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.

Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.

Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

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