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STARTING YOUR OWN BUSINESS
When you’re starting your own business in the UK, it’s crucial to understand your tax responsibilities.
The taxes you pay as a small business depend on many factors. For example, whether you’re a limited company or a sole trader, the type of business premises you have, and how much profit you make.
In this article, we’ll sum up what you need to know and go through the different obligations different business structures have.
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Different forms of tax have different payment schedules. The Income Tax and Payroll Tax year runs from 6 April to 5 April. If you complete a Self Assessment then you will make a payment twice a year.
The deadlines for paying your Self Assessment tax bill are:
31 January - any tax you owe from the previous tax year (also known as a balancing payment) and your first payment on account for the current tax year
31 July - your second payment on account
If your business is VAT (Value Added Tax) registered, you will typically need to pay this quarterly.
Payroll taxes are usually paid monthly, and Corporation Tax (if you’re not a sole trader but a limited company) is due 9 months and 1 day after the end of your accounting period.
While there are more specific types of tax, the ones you’ll most likely need to worry about as a small business owner are as follows.
Payroll Taxes are paid monthly. These are incurred if you employ anyone, or if you employ yourself, through a PAYE scheme.
Income Tax is paid on any income you receive personally which has not been paid via a PAYE scheme. This includes the dividends you might receive if you’re registered as a Limited Company. The Income Tax you owe is calculated in your Self Assessment return.
National Insurance pays for public services and your state pension. You pay it personally on Self Assessment, and employers contribute for their employees.
Value Added Tax (VAT) is an indirect tax. Most purchases and sales will have VAT depending on what type of goods and services are being bought and sold. Businesses must register for VAT if their turnover exceeds £85,000 - if your taxable turnover is below £85,000, you can register voluntarily. Unlike other taxes, VAT is usually paid quarterly.
Corporation Tax is paid on the profits of limited companies, limited partnerships and limited liability partnerships (LLP).
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 from HMRC, including interest added the longer you wait to pay. Understanding when it is necessary to pay the right amount is vital to remaining on top of your business finances.
Here is more detail about the types of taxes small businesses must pay, and whether they apply to sole traders, limited companies or partnerships.
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.
Certain Clubs, co-operatives, and associates.
The current main rate of corporation tax is set at 25% of your business profits, once all relevant allowances have been deducted. However, not all businesses will need to pay the main rate.
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.
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.
As a type of Self Assessment tax, corporation tax must be worked out by the business and filed to HMRC directly 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 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 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%
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.
As a shareholder in a company, you may pay yourself tax-free dividends up to £1,000 for the 2023/24 tax year, or £500 for the 2024/25 tax year, 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 2024/2025, 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
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 £90,000 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.
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 should 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 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. There are specific rules related to this, which do not include simply using an area of your home as an office. Or, find out more about claiming tax for working from home here.
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.
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.
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.
You’ll be relieved to hear, you don’t have to pay ALL these business taxes.
The taxes you need to pay will depend on a variety of factors – mostly, whether you’re a sole trader, a limited company, or a partnership. Whether you have employees, and where you operate from, also affect the taxes that apply.
Now we’ve covered some types of tax small businesses need to pay in the UK, here’s exactly what you need to do for your particular business structure.
The first thing you’ll need to do as a sole trader is keep records of your business’s earnings and expenses. This is so you can report the correct amounts to HM Revenue and Customs (HMRC) – and pay the right amount of tax on what you earn.
As a self-employed sole trader, you’ll need to register with HMRC for a Self Assessment tax return.
While the details can seem complicated, the overall gist of Self Assessment is simple: you report your earnings and expenses and HMRC then calculates how much tax you owe on your net income.
The simplest way to fill out your return is online, and this also gives you a later deadline: where paper returns must be submitted by 31 October, online submissions aren’t due until the following 31 January.
As your finances and those of your business are, legally speaking, one and the same, as a sole trader everything you earn by doing business counts as income for tax purposes.
The tax bands for tax year 2024-25 are as follows:
tax-free personal allowance: up to £12,570
£12,571–£50,5270: 20%
£50,271–£125,140: 40%
over £125,140: 45%
If you are subject to Scottish Rate of Income Tax you can find the tax bands here.
As these are marginal tax bands, they only apply to the portion of your income that falls within the band.
The self-employed must usually pay Class 2 and Class 4 NICs, in the following bands:
Class 2 Paid on annual profits above £6,725 £3.45 per week
Class 4 Paid on annual profits above £12,570 6% of profits between £12,570 and £50,270 and 2% of profits above £50,270
Completing the Self Assessment process will tell you how much you owe in each of these categories. After that, you’ll have a few options for how you pay, including by cheque, deposit or bank transfer.
To ensure you’re paying the right amount of tax, you need to keep regular accounts. This ties in with your obligations to file accounts with Companies House and file tax returns with HMRC. The easiest way to keep on top of this is to use online accounting software.
All limited companies pay Corporation Tax on their profits.
You must register your company with Companies House to get set up to pay Corporation Tax. Then, you must fill out your Corporation Tax return (CT600) and pay within nine months and one day of your company’s ‘normal due day’ – usually the anniversary of when your company was formed.
If your company is based in the UK, you pay Corporation Tax on all profits you make in the UK and abroad. Taxable profits include money you make from investments and from selling assets for more than they cost, as well as your regular trading profits.
The current Corporation Tax rate is 19%.
All companies that make £90,000 or more in any 12-month period are required to register for VAT.
While there are a few different schemes you can use to pay VAT, the general principle is the same: you charge VAT on the goods or services you provide, you then off-set the VAT you pay to your supplies for goods and services. You keep track of the net amount and pay it to HMRC.
VAT is usually paid quarterly by the 7th of the following month after the quarter ends. For example, if your VAT quarter is February to April, then you must submit your return and pay HMRC by 7 May.
If you’re registered for VAT, you will likely need to follow Making Tax Digital rules - a government initiative to submit tax records online.
If you have any employees, or even if you pay yourself a salary as a director, you need to pay Income Tax and NICs.
If you have registered as an employer with HMRC you have an obligation to pay Payroll Tax by operating PAYE and send a Full Payment Submission (FPS) to HMRC on or before every pay date, whether you pay yourself every month (or week) or pay other employees.
Using Payroll Software can help make this process easier, and automatically submit tax figures to HMRC for your employees.
Depending on the payments made, you will have to deduct Income Tax and National Insurance from the employee (or yourself) and also pay Employers National Insurance. There are other obligations such as providing pensions (depending on the employee’s age and wage) and statutory payments.
The tax year runs from the 6th April to 5th April and is split into 12 tax months. You must pay PAYE tax to HMRC by 22nd of the month following a tax month, for example you pay an employee 30th June which falls into the tax month 5th June to 7th July. The tax and National insurance due is paid by 22nd July. Or by the 19th of the month if you’re paying by cheque through the post.
Remember: even if no one is getting paid enough to qualify for Income Tax or NICs, you still need to report to HMRC, unless all employees are paid below the National Insurance lower earnings level, which for 2024-2025 is £123 weekly (or the equivalent monthly/annual values).
Why is this better than taking all your money as salary? Because it lets you keep more of the money. While dividends are taxed at three different rates dependent on the Income Tax band your earnings fall within, you don’t need to pay NICs on them.
In addition, you also effectively get a 10% tax credit when you draw dividends, as Corporation Tax has already been deducted.
You pay capital gains tax on any assets you sell for more than you bought them for, though some assets are tax-free. Only the gain you made is taxable, so you won’t need to pay tax on the full price you receive for the asset.
Finally, as a director, you’ll need to submit a Self Assessment tax return for your own earnings, including salary, dividends, and anything else.
You may also need to make payments ‘on account’. Put simply, if your tax bill is over £1,000 and you haven’t paid more than 80% of the tax you owe directly, you need to make a payment towards the following tax year.
This is a strange system, and while it can take some of the stress out of paying your tax bill in one lump sum, it really exists to make things easier for HMRC, ensuring they get some money in the current tax year.
At this point, it’s worth considering whether you ought to hire an accountant.
The answer will depend on a few factors: the size of your business, the sorts of tax you’re paying and even your personal preferences.
In some cases, you might want to hire an accountant on a temporary basis, to help you out when the time comes to sort your accounts at the year end. If you do choose to hire one, you can appoint them as your ‘agent’ to deal with HMRC on your behalf.
While LLPs differ from limited partnerships in some key ways, the tax responsibilities are similar for both business structures. We’ll note any important differences in the relevant sections below.
Both types of partnership must be registered with Companies House. LLPs must also send general accounts to Companies House. Limited partnerships only need to do so if the general partner is a limited company, but it is of course still useful to keep good records.
LLPs will also generally need to appoint an auditor for each tax year, but you can claim exemptions as a ‘micro-entity’ if your business is small enough.
To claim audit exemptions, your business must meet at least two of the following criteria:
annual turnover of less than £10.2 million
total balance sheet of less than £5.1 million
fifty employees or less on average
LLPs will also need to send a yearly confirmation statement, previously known as an annual return, to Companies House.
One of the key benefits of a partnership structure is that usually it’ll be ‘tax transparent’. This means that the partnership itself does not pay any Corporation Tax. Instead, partners are taxed individually on the share of income and gains they receive.
Corporate partners, however, may need to pay Corporation Tax, so it’s worth keeping this in mind when choosing your business structure.
Where each partner in an LLP must register for Self Assessment and pay taxes on their share of profits and losses, this only applies to the general partner in a limited partnership. The process is the same as for the self-employed, as are the income bands and NIC payments; see above for more detail.
As with limited companies, limited partnerships and LLPs must register for VAT if they are likely to turn over more than £85,000 in any given 12-month period. Once again, see above to learn more.
Yes, a sole trader will pay tax differently to a limited company. A sole trader will need to pay tax through Self Assessment, and won’t have to pay Corporation Tax like a company.
If you’re self-employed, you will need to declare your income and pay tax through Self Assessment. This can be done online or by post and must be submitted and paid by the 1st of January. You can also include any allowable expenses to claim tax back on.
If you haven’t done one before, here’s how to do a Self Assessment tax return.
Cash-in-hand payments must be declared as income through Self Assessment, so they can have tax and National Insurance contributions deducted. It must be dealt with and recorded like any other income, otherwise this is a form of tax evasion and illegal.
We hope you’ve found this summary of the different tax responsibilities of different types of business owners. It can be a lot to figure out, but it’s one of those things that’s absolutely worth getting your head around – after all, the last thing you want is to fall foul of HMRC.
Needless to say, there is a lot more to starting your own business in the UK than paying tax. Fill out this questionnaire to check if you’ve taken all the necessary steps to starting your business off right.
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