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Small business taxes - What do you need to pay?
As a small business in the UK, you will be expected to pay a number of different taxes depending on factors such as your business earnings, your classification as a sole trader or limited company, and the type of building you operate your business from.
Figuring out which taxes apply to your business can be a daunting prospect, especially as it is up to you to figure out which rates apply in most cases. In this easy guide, QuickBooks has set out exactly why each of these taxes may apply to your business, how you can calculate your tax, and how you can pay tax to HMRC.
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What taxes do small businesses pay in the UK?
There are a number of taxes you must pay as a small business in the UK, each with their own percentages and dates you are required to pay. Missing your tax deadline can also result in significant fines and penalties, including interest added the longer you wait to pay, so understanding when it is necessary to pay the right amount is vital to remaining on top of your business finances.
Corporation tax
If you run a limited company, you are required to pay corporation tax that is calculated as a percentage of your overall profits or taxable income, once expenses such as allowances, tax reliefs, and salaries have been deducted.
Corporation tax affects the following entities:
Limited companies.
Overseas companies operating within the UK.
Clubs, co-operatives, and associates.
The current rate of corporation tax is set at 25% of your business profits, once all relevant allowances have been deducted.
Corporation tax applies to businesses that are either based in the UK, or operate within the UK. If your company is based in the UK, but also trades in other countries, then you are required to pay corporation tax on all profits from the business. However, if your company is based abroad, but trades within the UK, then you are only expected to pay corporation tax on profits earned from business within the UK.
How does corporation tax affect a business?
If your company makes profits exceeding £250,000, then you are required to pay the main rate of corporation tax, currently set at 25%. However, for companies with profits less than £50,000, you are only required to pay the ‘small profits’ rate of 19%.
For companies that earn between £50,000 to £250,000 in profits a year, you may be entitled to a ‘marginal relief’, with the tax rate increasing with any profits you earn over £50,000 until you reach the 25% profit threshold.
For instance, if your company profits were £70,000 between 2023 and 2024, then you could be entitled to a marginal relief rate of 21.4%. This figure was calculated using the government’s marginal relief calculator.
How to pay corporation tax
As a type of Self Assessment tax, corporation tax must be worked out by the business and filed to HMRC directly, along with full payment, and is due nine months and one day after the end of the business accounting period. You can file corporation tax by completing a company tax return (CT600).
Capital allowances
Capital allowances refer to a type of relief you can claim against equipment, machinery, and vehicles purchased for the purpose of business use; including fleet vehicles and company cars. This can also refer to money spent on renovating your premises in disadvantaged areas of the UK, mineral extraction, research and development, and patent rights.
You must make a claim for Capital Allowance through a tax return, as these are not applied automatically, however, there is no fixed term on when you can make a claim for Capital Allowance.
Income tax
Income tax is tax applied to your personal income. The majority of people will pay their income tax through the PAYE scheme (Pay As You Earn), and this is automatically deducted from your salary or wages, and also includes your national insurance contributions.
For sole traders, you will pay income tax once your profit threshold exceeds the current tax-free allowance of £12,570, however, you may also be allowed to claim tax-free allowance on the first £1,000 you earn as a sole trader, known as a ‘trading allowance’. There is a similar relief available for landlords.
As the director of a company or small business, you will pay income tax on the salary you receive from your business, in accordance with the rate for your current tax band.
In the tax year 2023/2024, income tax rates are as follows:
Personal allowance up to £12,570 is taxed at 0%
Basic rate between £12,571 and £50,270 is taxed at 20%
Higher rate between £50,271 and £125,140 is taxed at 40%
Additional rate above £125,140 is taxed at 40%
How do I pay income tax?
Income tax is usually taken automatically if you are paid through PAYE, however, if you are a sole trader then you will need to complete a Self Assessment tax return.
Tax on dividends
As a shareholder in a company, you may pay yourself dividends up to £1000 tax-free, with any amount above this being subject to dividend tax.
Dividends are defined as rewards that a company may offer their shareholders, such as cash payments or stocks, and dividend tax depends on your individual tax band. In 2023/2024, the rates you will pay per tax band are as follows:
Basic rate 8.75% for income between £12,570 and £50,270
High rate 33.75% for income between £50,271 and £150,000
Additional rate 39.35% for income above £151,000
Value Added Tax (VAT)
VAT is a type of tax applied to most products and services sold within the UK, although there are some exceptions to this.
VAT is generally set at 20% of the total price of a product or service, and is usually applied and paid for by the customer at the point of purchase. You are required to register for VAT if your business’ turnover exceeds £85,000 annually, although you can still register if you are yet to reach this threshold.
You will be required to pay VAT collected to your sales minus any VAT incurred on your business expenses to HMRC. This is typically done on a quarterly basis.
VAT claim
As a VAT registered business, you can claim back any VAT paid by submitting a VAT return to HMRC.
Provided your company has maintained an accurate record of VAT purchases made within the most recent tax year, you should be able to claim all VAT back from business expenses. As of April 2019, all businesses must maintain a digital record of VAT purchases through the Making Tax Digital scheme, which aims to streamline VAT processes for all businesses.
QuickBooks have put together this essential guide for Making Tax Digital.
Business rates
Business rates apply to businesses that operate out of a non-domestic property. This will generally include:
Shops.
Offices.
Pubs.
Warehouses.
Factories.
Holiday rental homes and guest houses.
This type of tax may also apply if you use part of a building for your business, such as operating a business from a designated area of your home, but there are specific rules related to this which do not include simply using an area of your home as an office.
Business rates act in place of council tax for domestic properties, where the money you pay as a business is collected by local authorities to pay for municipal services such as the police, fire service, waste management, and more.
How is my business rate calculated?
Your business rate is calculated based on the ‘rateable value’ of your property - the open market rental value of the property, which is determined by the Valuation Office Agency (VOA).
To estimate the business rates you will be charged, you can multiply the rateable value of your property by the current multiplier set out by the government each year. If your property is valued at under £51,000, you can use the small business multiplier, whereas anything over £51,000 is calculated at the standard multiplier rate.
The current standard multiplier rate for 2023/2024 is 51.2 pence per pound of rateable value, and the current small business multiplier is 49.9 pence per pound. This rate has remained consistent since 2020.
For example, if your property has a rateable value of £10,000, you can use the small business multiplier, 49.9 pence. This would work as the following expression:
£10,000 x 0.0499 = £499.
This means that your total business rate for the year 2023/2024 would be £499.
You may also be entitled to a business rates relief if the rateable value of your property is less than £15,000. We have included more information about this in the tax relief section at the bottom.
How to pay business rate tax
Your local council will send your business rates bill in either February or March every year, this should contain instructions on how to pay your business rate, as each local authority may differ in how you can pay your bill. However, for most councils, there will be a government website you can visit to pay your business rate bill online.
The VOA revalues properties every 3 years to account for inflation and changes in the property market, therefore you should make sure to check your current rate every year to find if any changes have occurred.
What tax relief can small businesses claim?
A tax relief, or tax break, is a method to reduce the tax liability of your business depending on the type of business you operate; including how money is spent in the business, and the types of investments you make. Tax relief is partly intended to encourage certain business strategies and spending behaviours, such as encouraging your business to:
Donate to charity.
Invest in creative development within your business.
Invest in green technologies.
Update your vehicles to electric vehicles.
As with most tax reliefs, you will need to apply via the relevant authority before benefiting from any reductions, which includes submitting evidence to support your relief claim.
Small business rates relief
For businesses where the rateable value of their property is between £12,001 and £15,000, and you only operate out of one property, then you may be entitled to a business rates relief. If your property is valued under £12,000, then you are not liable to pay any business rates tax.
The relief rate reduces from 100% to 0% depending on the rateable value of your property. For instance, you would receive a 33% reduction if your property is rated at £14,000, and a 66% reduction if your business is rated at £13,000.
You can apply for this relief by contacting your local council.
Take control of your taxes
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The QuickBooks blog covers a wide range of business-related topics designed to help you grow and develop your business.
The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.
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