Main taxes that apply to small businesses

Small businesses face a number of taxes that they – and their directors – must pay. Here’s our guide to the small business taxes you should understand.

Small businesses in the UK are subject to a number of taxes, depending on the performance of your business and the activities it carries out.

Make sure you know which ones your business must calculate and pay to HM Revenue & Customs (HMRC) so you’re not caught out.

Missing tax deadlines can lead to a hefty fine from HMRC, as well as interest on any overdue taxes.

From Corporation Tax to VAT, here are the main taxes small business owners should know.

 

 

Corporation Tax

Corporation Tax is paid by limited companies only and is calculated as a percentage of a business’ profits or taxable income – generally, money the business makes after deducting all allowances, tax relief and expenses such as salaries.

Corporation Tax is self-assessed – the company works out how much Corporation Tax it owes and files the return with HMRC, along with payment for the tax it owes.

Corporation Tax is due for payment nine months after the end of the business’s accounting period or year end.

Corporation Tax is currently set at 25% of company profits.

 

Value Added Tax (VAT)

If your small business sells products and services, then it may need to start charging Value Added Tax, or VAT.

This is a tax that applies to most products and services sold in the UK, although some products and services – such as publications – can be exempt or have a reduced VAT rate.

The standard rate of VAT is set at 20% of the price a customer buys the product or service.

You can register your business for VAT at any time, but legally you must register your business for VAT when

• your total VAT taxable turnover for the last 12 months was over £90,000 (the VAT threshold)
• you expect your turnover to go over £90,000 in the next 30 days.

You can choose to register for VAT if your turnover is less than £90,000 (‘voluntary registration’).

VAT is charged to customers as a separate amount on an invoice, and is then paid to HMRC.

Once registered for VAT, you must start charging VAT on your sales from your effective date of registration.

You can then claim back any VAT the business pays on products on services.

 

National Insurance

If your business employs staff then you must pay National Insurance contributions.

These are paid directly to HMRC when the business pays staff salaries.

As a director of a limited company, you’re treated as an employee and are liable to Class 1 NICs, and your company has to also pay Class 1 NICs as well.

Employees pay 12% on earnings between £190 and £967, and 2% on higher earnings. Employers pay 13.8% on earnings above £156.

If you’re self-employed, you pay Class 2 or Class 4 NICs dependent on your profits.

You pay Class 2 NIC of £3.15 per week if your profits are above the Lower Profits Limit which is £11,908 in 2022/23.

If your profits are below the Small Profits Threshold of £6,725 in 2022/23 then you can choose to pay voluntary Class 2 NIC.

Paying voluntary Class 2 NICs will help someone self-employed to qualify for certain benefits including the state pension.

If your profits from self-employment are from the Small Profits Threshold to the Lower Profits Limit then there is no Class 2 NIC to pay – instead you will be treated as making Class 2 NIC.

This will mean you will be able to access  contributory benefits and the state pension in the same way as if you had paid Class 2 NIC.

You pay Class 4 NICs if your profits are more than 9.73% of all earnings between £11,909 and £50,270 and 2.73% on earnings above £50,270.

Class 4 NICs do not count towards benefit entitlement.

 

Income tax

As a sole trader, you must pay income tax based on the profits of your business.

You’ll start paying income tax once your profit goes above your personal tax allowance, which is £12,570 in 2023.

If you’re a company director of a small business, you pay income tax on any salary you take from the business, and you’ll pay tax according to the same tax thresholds as any employee in a company.

Income tax is usually collected via PAYE (Pay As You Earn) and paid directly to HMRC on the 22nd of each month.

 

Business rates

Depending on the type of business you run and its office location, your company may need to pay business rates.

Business rates are usually applied if you operate your business from dedicated premises, such as a shop or office.

Business rates operate like Council Tax, and different businesses may have to pay different rates – there are also lots of business tax relief schemes and grants available.

If you run your business from home and don’t have visiting customers, or have not converted part of your home for the dedicated business activity, then you should not generally have to pay business rates.

 

 

Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.