There are many benefits to running your own business. As well as offering more flexibility and independence, there’s the potential to earn more and have greater job satisfaction.
But there are also downsides. For a start, the financial risk is higher and you may end up working longer hours to ensure your business succeeds. Then there’s the rather unpleasant matter of tax.
Any money you make for yourself, rather than as an employee, will be subject to business tax. And as there are penalties for paying late, it’s vital you’ve set aside enough funds to cover your annual tax bill and know when it’s due.
This guide explains all you’ve ever needed to know about business tax.
The type of tax you pay as a small business will depend on your company’s business structure and whether or not you employ staff.
If you’re a sole trader or a partnership, for example, you’ll pay income tax and Employees’ National Insurance contributions. If you’re a limited company, you’ll pay corporation tax.
A full breakdown of the taxes you might have to pay can be found below:
If you run a limited company, you will need to pay corporation tax on all business profits. You must register for this tax when you set up as a limited company.
Corporation tax is currently payable at a flat rate of 19%, no matter how much profit your business makes.
Unlike other taxes, you won’t get a bill for a corporation tax. It will be up to you to make sure you calculate how much you owe.
Income tax is paid on any income you receive personally, such as your salary. If you’re a sole trader, for example, you’ll pay income tax on the profit you make from your business.
Income tax kicks in once your salary goes above the personal allowance of £12,570 in the 2022/23 tax year, and the amount you pay will depend on your tax band.
Value Added Tax (VAT) is added to most goods and services, usually at the standard rate of 20%.
If your business reaches a turnover of more than £85,000 you must be VAT-registered, although you can also voluntarily register for VAT if your business is smaller. If your business is VAT-registered you must charge your customers VAT on top of your prices.
However, you can also reclaim VAT for anything you buy for your business, such as laptops or stationery.
If you run your business from anywhere that isn’t a domestic property, you will usually need to pay business rates. The amount you pay will be based on the property’s ‘rateable value’.
This is its open market rental value, based on an estimate by the Valuation Office Agency (VOA) on 1 April 2015.
Your local council will send you a business rates bill in February or March each year for the following tax year.
If you’re an employer, you will need to make National Insurance Contributions (NICs) on your employees’ income.
You’ll pay 15.05% for employees with annual earnings above £9,880 between 6 April and 5 July 2022, and 15.05% for employees with annual earnings above £12,570 from 6 July 2022.
If you’re a sole trader, you’ll usually pay two types of National Insurance:
Class 2 if your profits are £6,725 or more a year
Class 4 if your profits are £9,881 or more a year
Class 2 contributions are £3.15 a week. Class 4 are 10.25% on profits between £9,881 and £50,270 and 3.25% on profits over £50,270. NICs can be paid through your self-assessment.
Self-employed individuals and people in partnerships must pay Capital Gains Tax (CGT) if they make a profit (‘gain’) when selling all or part of a business asset, such as land, machinery, or shares.
How much you pay will depend on your individual income tax band. If you’re a basic rate taxpayer, you’ll pay 10%, if you’re a higher or additional rate taxpayer you’ll pay 20%. The rate rises to 18% and 28% respectively if you’re selling a property that’s not your main residence.
The gain is calculated by taking the proceeds from the sale and deducting the cost of the purchase. There is also a personal gains tax-free allowance of £12,300 to factor in, similar to the allowance for income tax.
If you pay yourself in dividends, the first £2,000 will be tax-free, but dividend tax will be due on anything over that.
How much you pay will depend on your income tax band. If you’re a basic rate taxpayer, you’ll pay 8.75%, if you’re a higher rate taxpayer, you’ll pay 33.75% and if you’re an additional rate taxpayer, you’ll pay 39.35%.
For many types of small business tax, you will need to fill in a form to send to HMRC.
For corporation tax, you must submit a CT600 form (a company tax return), detailing the company’s income, plus deductions for tax allowances and expenses. You will then need to log onto your HMRC account and choose your payment method.
With income tax, you will need to submit a self-assessment tax return to HMRC to work out how much tax you owe.
Tax can be paid to HMRC through online or telephone banking, by using a debit or corporate credit card online, at your bank or building society (you’ll need a paying in slip from HMRC) or via direct debit, BACS or a cheque through the post. You’ll need to use your Unique Taxpayer Reference (UTR) number followed by the letter ‘K’ when making your payment.
If your company pays you your salary, income tax will be collected under the Pay As You Earn (PAYE) scheme.
Business rates are paid to the local authority where your premises are based. You’ll pay your bill over a 12-month period, with the bill split into 10 instalments. You can usually pay via direct debit, online, at your bank or over the phone.
Business tax won’t usually be payable immediately, but different taxes have different payment schedules, as outlined below:
You must submit your company tax return within 12 months of the end of your company’s accounting period. However, your corporation tax bill must be paid nine months and one day after the end of your company’s accounting period.
This means it’s best to complete your company tax return early so that you know how much you owe. The accounting period is normally the same as your company’s financial year.
There are penalties for filing late. If you file one day late, you’ll pay £100, and another £100 is payable if you file up to three months late. Penalties are even higher if you file later.
You must complete your online self-assessment tax return by 31 January after the end of the tax year it applies to. If you’re submitting a paper return, the deadline is the earlier date of 31 October.
For example, for the 2021/22 tax year, paper returns must be sent off by 31 October 2022 and online tax returns must be completed by 31 January 2023. Tax must also be paid by 31 January – though there may be a second payment due by 31 July (more on this below).
If your tax return is up to three months late, you’ll pay a late filing penalty of £100. The penalty increases if you file even later, or if you pay your tax bill late. Employing an accountant can help ensure you file on time.
If you’re VAT-registered, VAT returns should be submitted on a monthly or quarterly basis, even if you have no VAT to pay or reclaim. All VAT-registered firms must sign up for Making Tax Digital (MTD) and record and submit VAT figures using MTD-compatible software.
If you’re self-employed and the income tax due in your first year of trading is more than £1,000, you will also need to make payments on account.
These are payments towards your next year’s income tax and are made twice a year. The amount you pay each time will be half of your previous year’s tax bill. The first payment is due by 31 January and the second by 31 July.
Payments on account can be a nasty shock first time round if you’re not prepared for it, as your first payment will be due the same day you pay off your bill for the previous year.
For example, if you started trading in 2020/21 and had a tax bill of £5,000 for that year, this amount would be due for payment on 31 January 2022.
However, you would also have to make your first payment on account of £2,500 (half of £5,000) for your 2021/22 tax bill by 31 January 2022, taking your total payment to £7,500. The second payment on account of £2,500 would be due by 31 July 2022.
If you end up paying too much tax because your actual tax bill ends up being lower, you’ll be refunded the difference by HMRC.
That depends. Everyone has a trading allowance that lets you earn up to £1,000 each financial tax year without paying tax on this income.
However, if the amount you earn exceeds the £1,000 limit, you’ll need to register for self-assessment and start paying tax.
Similarly, the property allowance also allows you to earn up to £1,000 tax-free each tax year. This could be handy if you rent out your loft or other storage space or if you rent out your driveway.
Yes, there are a few options worth exploring:
If your property’s rateable value is less than £15,000 and your business only uses one property, you might qualify for business rates relief. This means:
You won’t pay business rates on a property with a rateable value of £12,000 or less
The rate of relief will reduce gradually from 100% to 0% for properties with a rateable value of between £12,001 and £15,000
If you’re a business or charity and your Employers Class 1 National Insurance liabilities were less than £100,000 in the previous tax year, you may be able to claim Employment Allowance. This allows you to reduce your annual NI liability by up to £5,000.
You can claim capital allowances if you buy assets that you keep to use in your business, such as equipment, cars and machinery. This allows you to deduct some or all of the value of the item from your profits before paying tax.