Small business tax

Anyone who runs a small business needs to understand which taxes they are required to pay, and by when, to avoid hefty penalties.

How your business is set up and whether you have any employees can affect what tax your business pays. All businesses are taxed on their profits, but the way in which this is done will depend on whether you’re a sole trader or a limited company. 

Sole trader

To be a sole trader you must be the single owner of the business, with no partners or directors, although you can still hire employees. Being a sole trader means you have full control of the business. But you will also be personally responsible for any debts your business takes on and for the tax your business must pay. 

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. This is £12,570 for the 2023/24 tax year. 

On top of this, you will need to pay National Insurance and, if you earn more than £85,000 in a 12-month period, you must register for Value Added Tax (VAT).

Limited company

A limited company is a type of business that is legally separate from its owners. Limited companies must be incorporated with Companies House and have a unique company registration number. If you set up as a limited company, you will need to pay corporation tax on your profits and, if you supply VAT-able goods or services and your taxable turnover is above £85,000, you will need to register for VAT.

To pay income tax as a sole trader, you’ll need to register for self-assessment. This must be done by 5 October in your business’ second year, but you can register as soon as you start trading if you prefer. 

Limited companies need to register for corporation tax when the company is set up and within three months of starting to trade. 

If you fail to register, you could face a fine. Further penalties will apply if you don’t complete your tax return on time. 

The steps for registering depend on whether you’re registering for self-assessment or corporation tax, but the easiest way for both is online through the gov.uk website.

Registering for self-assessment

1. Set up a Government Gateway account

Head to the gov.uk website, where you’ll need to set up a Government Gateway account. You’ll then be given a user ID so you can set up your password.

2. Complete an online form

Fill in the online form, providing personal information and details about the work you plan to carry out once you’re set up. If you can’t complete the form online, print it out and send it by post to HMRC.

3. Wait for your UTR

Once you’re registered, you’ll receive a letter in the post with your Unique Taxpayer Reference (UTR) number. You’ll need this when you file your tax return. 

Registering for corporation tax

1. Sign into your business tax account

Sign into your business tax account on the gov.uk website using your company’s Government Gateway user ID and password. If you don’t already have one, you can create one at sign in. You’ll also need your company’s UTR which you should have received when you registered your company with Companies House.

2. Provide company details

You’ll need to tell HMRC your company’s registration number, the date you started to do business and the date your annual accounts are made up to. You’ll then be ready to file your company tax return when it’s due.

The easiest way to minimise your tax bill is to claim back your tax allowable expenses. These can include:

• Office costs, such as stationery and phone bills

• Travel costs

• Clothing, such as uniforms

• Stock and raw materials

• Marketing costs

• Heating and electricity bills

• Staff costs

However, you won’t be able to claim these expenses if you use your £1,000 tax-free trading allowance. Find out more about this on the government website. 

If you pay corporation tax, it’s also worth checking whether you qualify for any of the tax reliefs mentioned earlier, such as R&D relief or reliefs for creative industries. 

Hiring an accountant can help ensure you run your business as tax efficiently as possible.