Learn the ins and outs of the various types of taxes that affect small businesses, such as corporation tax, value-added tax, capital gains tax, and capital allowance.
What kinds of taxes are levied against small businesses?
When you manage a small business, the business structure of your firm will determine the sort of tax you must pay as well as the method by which you must pay that tax.
Tax obligations will be calculated differently for a limited business, a partnership, and a sole proprietorship.
In this article, we will discuss the many taxes that are associated with owning a business, as well as the methodology behind how these taxes are determined. On our guide to each individual tax, you’ll discover more information that goes into further detail.
Tax on corporations
19 percent – limited companies
The earnings earned by limited firms are subject to corporation tax, but profits obtained by lone traders or partners are not.
It is determined after wages and other business expenses have been paid, but before profits have been withdrawn from the company.
Companies, in contrast to individuals, do not receive any form of personal allowance from the corporate tax; hence, tax must be paid on all profits.
The rate of taxation on corporations is fixed at 19 percent of annual profits, regardless of how successful the company is.
How much will it cost?
It can be difficult to file and pay corporation tax due to the fact that the accounting year for each company is distinct.
Each year, you will be required to provide HMRC with information regarding the firm’s income, as well as deductions for tax allowances and expenses, by submitting a company tax return using form CT600. This form is also known as a company tax return. This must be completed within a year from the closing of the accounting date for your organisation.
On the other hand, you’ll have to make payment on your corporation tax bill nine months and one day following the end of the accounting date for your company. Therefore, from a practical standpoint, it makes the most sense to finish your company’s tax return early in order to determine how much corporation tax you are obligated to pay.
It is up to the company to report how much tax it owes to the government in the form of a corporation. You won’t receive instructions from HMRC.
If you pay your taxes late, file your tax return after the deadline, or supply information that is erroneous, you run the risk of getting a fine from the HMRC.
To make a payment, you will need to sign into your HMRC account and select a payment method from the available options, which may include an online payment, a direct debit, a company credit card, or a payment through your bank. You also have the option to make payments via the phone.
You are not allowed to use a personal credit card, and you are unable to make payments in post offices.
Learn more about it by reading up on the corporate tax.
Value Added Tax (VAT)
20 percent — clients of companies that are registered to collect VAT
A value-added tax known as VAT is added to the majority of products and services. There is a conventional VAT rate of 20 percent, which applies to most products; however, there is a reduced rate of 5 percent that applies to specific things, including children’s car seats and home energy.
If your company is registered to collect VAT, you are required to charge clients an additional amount to account for the tax. You will, however, be entitled to reclaim the value-added tax (VAT) that you pay on expenses incurred by your firm.
Unless their annual taxable sales is greater than the VAT threshold—which will remain at £85,000 until the 31st of March in 2024—companies are not required to register for VAT.
On the other hand, you are free to do so voluntarily. This provides you with the benefit of being able to claim VAT back on anything you purchase for your business, such as laptops, tools, and stationery. On the other hand, this does mean that you will have to file VAT returns with HMRC.
How much will it cost?
Making Tax Digital (MTD), which requires businesses to keep digital records and file VAT returns using software that is compatible with MTD, is now required and must be used by all firms that are registered for VAT.
Since April 2019, firms that have a taxable turnover of more than £85,000 have been forced to comply with this regulation. On April 1, 2022, however, this regulation became mandatory for all VAT-registered enterprises, regardless of turnover.
If this applies to your company, you are required to register for Making Tax Digital, maintain digital VAT records, and submit your VAT returns to HMRC using software that is compatible with the new requirements. There is a list of software that is compatible available online.
You are required to start keeping digital records as of the 1st of April 2022, or the beginning of your VAT period, whichever comes first.
Learn more about the VAT return for those who are self-employed here.
Taxes on enterprises
If you conduct your company out of a location that is not a residential property, such as an office, store, factory, or warehouse, then it is quite likely that you will be subject to paying business rates on the property in question.
In a manner analogous to that of the council tax, local administrations are responsible for calculating and distributing business rates bills. You may typically expect to receive the invoices around February or March, and they will outline the total amount that is due for the fiscal year that will begin on April 1 of the following year.
The property’s ‘rateable value,’ which is its estimated value if you were to sell it on the open market, is used to compute the business rates that are owed on the building. The Valuation Office Agency (VOA) is the organisation in charge of reassessing commercial properties. The most recent revaluation took effect on April 1, 2017, and it uses values as of April 1, 2015 to make its comparisons.
If you run a business out of your house, there are a few situations in which you can be subject to paying business rates instead of residential rates. Something like this might occur if:
if you have employees who come to work at your home if you sell goods or services from your home to customers who visit the property if you have adapted your home to work there — for example, converted a garage — if the property is part-business and part-domestic — for example, a pub with living quarters above it — then you are running a home-based business.
The HMRC provides additional information that can assist you in estimating the cost of your business rates.
Rate relief for smaller businesses
There is a possibility that you could qualify for business rates relief if the rateable value of your property is lower than £15,000 and your company operates from a single location.
You will not be required to pay any business rates if the rateable value of your property is less than $12,000. The rate of relief will gradually decrease from one hundred percent to zero percent for properties having a rateable value between twelve thousand one hundred and fifteen thousand pounds.
You will receive a discount of 33 percent on your commercial property taxes, for instance, if the rateable value of your property is 14,000.
You will need to get in touch with your local council if you want to submit an application for this relief.
How much will it cost?
The local government in the area where your company’s facilities are located is the entity that receives payment for “business rates.” As is the case with the council tax, the majority of councils divide the bill into ten equal instalments that are to be paid off over the course of a year.
Most will accept a variety of payment options including direct debit, phone payments, payments made online, and payments made at the customer’s own bank.
8.75 percent – base rate
A significantly higher rate of 33.75 percent
39.35 percent – extra rate
If you are a stakeholder in a corporation, you have the ability to pay dividends to yourself. If you get more than £2,000 in dividends each year, however, you will be required to pay dividend tax on the additional amount.
Your income tax band determines the rate that you’ll be responsible for paying. Those who pay tax at the basic rate will pay 8.75 percent, those who pay tax at the higher rate will pay 33.75 percent, and those who pay tax at the additional rate will pay 39.35 percent in 2022-23.
These rates are greater than the ones that were in effect in 2021-22, which were 7.5 percent for taxpayers who paid the basic rate, 32.5 percent for taxpayers who paid the higher rate, and 38.1 percent for taxpayers who paid the additional rate.
If dividends are your only source of income, you are permitted to exhaust both your personal allowance and your dividend allowance at the same time.
For the fiscal year 2022–2023, this indicates that you are permitted to earn the personal allowance of £12,570 in addition to the dividend allowance of £2,000; hence, you are able to earn a total of £14,570 from shares without being required to make any tax payments.
You might move shares into a stocks and shares Isa to prevent paying tax in the future and further lower the amount of tax that you are required to pay. You will, however, be restricted to making contributions of up to £20,000 into an Isa during any one tax year.
How much will it cost?
You are required to report any income from dividends that you received on your tax return for self-assessment.
Find out more about the dividend tax here.
Tax on income
20 percent – base rate
40 percent; this represents a higher rate
45 percent – extra rate
Because individuals are the only entities who are required to pay income tax, company owners will not be responsible for paying any income tax on behalf of their companies.
On the other hand, they will be required to pay income tax if the amount of their remuneration is greater than the personal allowance, which will remain at £12,570 for the tax year 2022-2023 (it was the same amount in 2021-2022).
The tax bracket you fall into will determine the total amount you have to pay. Bear in mind that other earnings, such as dividends, interest on savings, or capital gains, may also count towards your income and put you into a higher tax bracket if they are substantial enough.
How much will it cost?
If you run your firm as a sole proprietor, you are responsible for paying income tax on whatever profits it brings in. In order for HMRC to determine how much tax money is owed to you, you will need to file a tax return using the self-assessment method.
If you are paid by the company, then your income tax will be deducted using the PAYE system that the company uses. At this point, you’ll also be responsible for making payments on any personal National Insurance contributions that are due to you.
Find out more about tax brackets and deductions here.
Insurance on a National Scale
15.05 percent – employer NI contribution
If you run a company that employs other individuals, you are obligated to make direct payments to HMRC in order to cover the employer’s share of the National Insurance obligations. Employers are responsible for paying a NIC tax rate of 15.05 percent on employees’ wages that are greater than £9,880 per year in 2022-23 between the dates of 6 April and 2 July 2022, and earnings that are greater than £12,570 between the dates of 6 July 2022 and 5 April 2023.
In the fiscal year 2021-22, companies contributed 13.8% of an employee’s wages above £9,568 to their retirement fund.
If, on the other hand, your company qualifies for the Employment Allowance, you could get a reduction in your national insurance contributions of up to £5,000 as a result. This was initiated in April of 2014 with the purpose of assisting small businesses in increasing their staffing levels.
In addition, if you are paid by your limited company in the capacity of an employee, your National Insurance contributions will be deducted from your paycheck on a regular basis.
As part of the self-assessment tax process, sole proprietors are required to pay national insurance premiums.
The following is a breakdown of how self-employed NICs will be calculated for the 2022-2023 tax year:
Those who have profits that are lower than £6,725 will not have to pay the tax.
Those who earn between £6,725 and £9,880 annually won’t be obliged to pay Class 2 contributions, but they will still accumulate National Insurance credits beginning on April 6, 2022 and continuing until July 5, 2022.
Those who earn between £6,725 and £12,570 annually will not be obliged to make Class 2 contributions from the 6th of July 2022 through the 5th of April 2023, although they will still accumulate National Insurance credits.
In addition to the Class 4 contributions of 10.25 percent on earnings up to £50,270, individuals who earn more than £9,880 between the 6th of April and the 5th of July, or more than £12,570 after the 6th of July, will be required to make Class 2 contributions of £3.15 each week.
Those whose annual earnings are greater than £50,270 are required to make Class 4 payments at a rate of 3.25 percent.
The following is a breakdown of how self-employed NICs operated during the 2021-22 tax year:
Those individuals who have profits that are lower than £6,515 will not be compelled to make a payment.
Those whose weekly earnings are between £6,515 and £9,568 are subject to the Class 2 contribution rate of £3.05, while those whose profits are between £9,568 and £50,270 are eligible for the Class 4 contribution rate of 9%. (plus Class 2)
Anything over £50,270 will be subject to a tax rate of 2%, which is the Class 4 rate.
Learn more about the costs of national insurance here.
Capital Gains Tax (CGT)
10 percent is the standard rate.
Twenty percent more, in addition to the current rate
When you sell anything and make a profit, you are responsible for paying CGT. In the case of persons, this usually refers to their goods. Whether you are the owner of a small business, you will receive compensation if you sell or donate an asset, shares, or your entire firm.
The rate that you pay will be determined by the individual income tax that you are subject to; taxpayers who are subject to the basic rate pay 10 percent, while taxpayers who are subject to the higher and additional rates pay 20 percent. If you are selling a property that is not your primary residence, the rate increases to 18 percent for those who pay the basic rate, and it increases to 28 percent for those who pay the higher or additional rate.
Keep in mind that profits on investments will be factored into your total income for the year; hence, a significant profit could cause you to fall into a higher tax rate.
You can calculate how much you will owe on the sale of your business by taking the sales price and deducting what you paid for the business, any investments you made in the business, and any costs associated with buying or selling the business. This will give you the amount that you will pay on the sale. After then, you are just responsible for the profits.
Your personal allowance for long-term capital gains can be subtracted from this total. Individuals will be able to earn up to £12,300 before paying taxes in 2022-23 (this threshold was the same before 2021-22), and couples will be able to combine their allowances.
In our comprehensive guide to the taxation of capital gains, you can discover additional information.
The business assets relief programme, often known as the entrepreneurs’ relief programme, was just passed.
You can qualify for entrepreneurs’ relief, which will lower the amount of capital gains tax (CGT) you have to pay in certain situations. If you meet the requirements, the initial £1 million of your gains will be subject to capital gains tax at a reduced rate of 10%.
This allowance is calculated on a person-by-person basis, rather than on a business-by-business basis.
It’s possible that you can make a claim if:
you are a sole proprietor or a partner selling part or all of your business or its assets you control at least 5 percent of the company’s net assets, of which you are selling, and you are entitled to 5 percent of the company’s distributable profits you sell assets from the business within three years of shutting it down you sell assets from the business within three years of shutting it down you control at least 5 percent of the company’s net assets, of which you are selling and you are entitled to
You will need to have been in qualifying circumstances for at least two years, and the relief does not apply to property portfolios. However, furnished holiday letting enterprises are the one exception to this rule.
Any gains that are made beyond the threshold of one million pounds will be subject to the maximum capital gains tax rate.
How much will it cost?
You are required to report any gains you have made on investments as part of your income tax return.
When you purchase specific tools for your firm, such as vehicles, equipment, or machinery, you are eligible to make a claim for a capital allowance under the tax code.
You may be able to deduct all or part of the cost of these products from your business profits before having to pay tax, which will result in a lower overall tax liability for you.
The annual investment allowance (AIA), which applies to sole proprietorships, partnerships, and limited liability organisations, has had its cap temporarily raised to one million pounds until March of 2023. This is applicable to the portion of an organization’s tax period that begins on January 1, 2022.
You can also make use of the “writing down allowance” for assets that are not covered by the guidelines of the AIA.
In this guide on capital allowances for the self-employed, we explain how the system operates.
Putting in a claim
Sole proprietors are eligible to make a claim on their tax return. Partners will need to file their claims using a partnership tax return, while limited firms will need to file their claims using a company tax return.
If you are a solo proprietor or a partner in a business and your annual revenue is less than 150,000 pounds, you might be eligible to utilise a more straightforward method known as the “cash basis” instead.