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Small business tax

Small business tax keeps your company legally compliant

This guide explains the different taxes to be aware of as a small business, how to register for tax and what you can do to legally reduce the amount you pay.
Last updated
November 29th, 2023

Types of small businesses and tax implications

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.

Registering your business for tax

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.

If you fail to register your business for the right tax, you could face a fine."

The types of taxes a small business might pay:

Exactly what taxes you’ll need to pay will depend on a range of factors including the structure of your business (sole trader or limited company), how much profit you make, and how you pay yourself as an owner. While you won't pay every single business tax out there, here are the key ones to consider:

VAT

Businesses must register for VAT if their VAT taxable turnover for the last 12 months was more than £85,000.

Income tax

This is a tax paid on certain types of income, including profits you make if you’re self-employed.

Corporation tax

This is a tax applied to limited company profits after salaries and other business expenses have been paid.

National Insurance

There are different types, or classes, of National Insurance. The type you pay depends on your employment status and how much you earn.

How can businesses reduce their tax bill?

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.

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

Tax can feel intimidating for small businesses, and not just when you're starting out. But understanding the ways to legally reduce your tax bill can save you a lot of money. Just remember to register your business as soon as you can so you avoid paying any fines.

FAQs

How do I register my small business for tax in the UK?

The easiest way to register for small business tax is online via the gov.uk website. You’ll need to set up a Government Gateway account and fill in an online form.

What is the difference between personal and corporate tax rates?

If you’re a sole trader, you’ll pay income tax on the profits of your business. It’s charged as a percentage of earnings. If you run a limited company, corporation tax will be due on the company’s profits.

Can I claim tax deductions for home office expenses?

If you’re self-employed and work from home, there are certain business expenses you can deduct from your tax bill. These include office equipment such as computers and furniture, as well as heating, electricity and broadband bills. It’s worth familiarising yourself with the rules on the gov.uk website.

What are the penalties for late tax filing?

If you file your self-assessment or company tax return late, you’ll be fined £100. After three months, this fine will increase. For company tax returns, you’ll be charged another £100 and after six months, HMRC will estimate your corporation tax bill and add an extra 10% of the unpaid tax. After 12 months, another 10% will be added. 

About the author

Rachel Wait
Rachel has written extensively on credit cards, pensions, insurance and mortgages for leading price comparison sites and the national press.

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