As business owners, we all want to watch our sales soar. But running a business also means paying tax – from business rates to National Insurance Contributions – so it’s important to understand your tax responsibilities. In this small business tax guide, we’ll look at everything from VAT to Corporation Tax and more.
When does a small business have to pay tax?
The taxes you pay as a small business depend on whether you’re set-up as self-employed – either a sole trader or partnership – or as a limited company. Your tax liabilities also depend on how much money your business makes. We’ll cover each business tax in more detail later, but here is a quick summary of how much you can generally earn before paying these taxes, where applicable (although there are of course some exceptions) :
- VAT – you have to register your business for VAT if your taxable turnover from exempt goods was greater than £85,000 in past 12 months or is expected to be in the next 30 day period.
- Corporation Tax – If you’re a limited company, any taxable profits you make will be liable for Corporation Tax (19% 2021/22).
- Income Tax – As an individual, you’ll have to pay Income Tax on your earnings – including any money withdrawn from the company in dividends – above any available personal allowance (£12,570 2021/22). Your personal allowance is broadly reduced by £1 for every £2 of adjusted income you earn over £100,000.
- Business rates – You’ll pay business rates, as determined by your local authority, if you run your company from a non-domestic property, such as a shop, warehouse or office. You may be eligible for small business rate relief – find out more.
- National Insurance Contributions – If you hire staff, you’ll pay employer Class 1 National Insurance Contributions rates of 13.8% on earnings (above £8,840 2021/22).
- Dividend tax – If you’re a company shareholder, you can withdraw £2,000 in dividends per year tax-free, in addition to utilising any available personal allowance. Read more about how dividends are taxed.
- Capital Gains Tax (CGT) – if you’re self-employed as a sole trader, or in a business partnership, you may have to pay CGT on certain assets you sell, and some assets are exempt. Find out more here.
How to pay VAT
If you’re VAT-registered, you’re normally obliged to submit a VAT Return every three months online . You’ll need to include information such as your total sales and how much VAT you owe, even if the answer is zero. You can use bookkeeping software to work out the VAT you’ve charged customers and the amount you can reclaim. Read more about charging VAT in our guide to pricing products.
How much Corporation Tax do I owe?
Corporation Tax is paid by limited companies – profits are taxed currently at 19%. The rate is set to rise to 25% by April 2023, but only for companies with a turnover of £250,000 or more. If your business generates £50,000 or less per year, you’ll still pay 19% Corporation Tax on profits. Companies whose profits fall between the thresholds will pay the 25% rate, but can claim ‘marginal relief’.
How to pay Corporation Tax
If you’re liable for Corporation Tax, you’ll generally need to pay within nine months and one day of your last accounting period, and file a Company Tax Return within 12 months, although some companies have to make quarterly payments. You won’t receive a bill to pay Corporation Tax; so you’ll need to remember these deadlines yourself. Many business owners hire an accountant to help with their Corporation Tax. Once you know the amount you owe, you can pay your Corporation Tax bill online.
How business rates are calculated
If you run your business from a non-domestic property, you will receive a business rates bill from your local authority in February or March each year. The council base the amount on a building’s ‘rateable value’, which is calculated by the Valuation Office Agency. If you want to challenge the amount charged, you can ask for a correction online.
Paying National Insurance Contributions as a business
If you hire people to work for your business, you’ll need to make National Insurance deductions from your employees’ pay. Your staff will pay Class 1 National Insurance Contributions (NICs) on earnings above £184 per week (2021/22), and you as a business owner make a secondary contribution of 13.8% of earnings above £170 a week (2021/22). You will need to pay employer’s National Insurance as part of your PAYE bill.
Self employed pay Class 2 and Class 4 National Insurance Contributions. To find out more on national insurance contributions and the different classes, you can visit GOV.UK
Get more support from Tyl
From getting paid to managing your accounts, our articles and guides can provide some guidance. Here are some handy links to our business guides: