Running a small business comes with various responsibilities, and understanding taxation is one of the most important. Whether you’re a sole trader or a limited company, knowing the types of taxes you’re liable for can help you stay compliant and plan your finances more effectively. In this guide, we’ll break down the key taxes that small businesses pay in the UK and the reliefs that can make taxation more manageable.
Types of small business company taxes
Small business taxation depends on your business structure and turnover. Below are the main types of taxes that small businesses in the UK may need to pay.
Corporation tax
If you run a limited company, you’ll need to pay corporation tax on your profits. This applies to income earned from business activities, including trading, investments and asset sales.
Current rate: As of 2024, corporation tax is charged at 25% for companies with profits over £250,000. A lower rate of 19% applies to profits below £50,000, with a tapered rate for profits between these thresholds.
Filing and payment: Corporation tax returns must be filed annually with HMRC, and payments are due nine months and one day after the end of your company’s accounting period.
VAT (Value Added Tax)
VAT is a tax on goods and services that most businesses collect on behalf of HMRC. This happens once their taxable turnover exceeds the VAT registration threshold.
VAT threshold: £90,000 annual turnover (as of 2024)
Rates: Standard (20%), reduced (5%), and zero-rated (0%)
Filing and payment: VAT-registered businesses must submit quarterly VAT returns and pay any VAT owed to HMRC
National insurance
National insurance contributions (NICs) apply to both business owners and their employees. The type and rate of NICs depend on your business structure.
💡Editor's insight: "National insurance is divided into classes. It sounds more complicated than it is. Class 1 is paid by employees and employers, Class 2 if you're self-employed, Class 3 is a voluntary contribution and Class 4 is paid if you’re self-employed and have profits over a certain amount."
Sole traders
There are two main classes of NICs for sole traders:
Class 2 NICs: These are payable as a weekly rate of £3.45 for the 2023/24 tax year
Class 4 NICs: This is payable as a percentage of sole trader profits
Limited companies
Everybody who is paid a salary above the current threshold needs to pay national insurance contributions. For limited companies, Class 1 NICs will apply for employees earning above £242 per week. Primary class 1 NICs are paid through PAYE.
Income tax
For sole traders and partnerships, income tax is calculated on the business’s taxable profits after deducting allowable expenses.
Rates: The standard income tax rates in the UK are 20% (basic), 40% (higher), and 45% (additional), depending on your earnings.
Self-assessment: Sole traders must file a self-assessment tax return annually, detailing their business income and expenses.
Directors of limited companies must also pay income tax on their salary and dividends. Though dividends are taxed at lower rates compared to income from employment.
Business rates
Business rates are taxes on non-domestic properties, such as offices, retail stores, and warehouses. These are similar to council tax but apply to commercial premises.
How they’re calculated: Business rates are based on the property’s rateable value, which is determined by the Valuation Office Agency.
Filing and payment: Business rates are typically paid in monthly instalments to your local council.
Home-based businesses usually don’t pay business rates unless a substantial part of the home is used exclusively for business purposes (like a workshop or shop).
Small business rate relief
If you’re a small business with premises that have a low rateable value, you might qualify for small business rate relief (SBRR) to reduce or eliminate your business rates.
Eligibility: Businesses with a rateable value of £15,000 or less can receive relief. Properties with a rateable value under £12,000 are fully exempt.
How to apply: Contact your local council to claim the relief.
This relief can be valuable for start-ups and small businesses operating on tight budgets, helping them save on overhead costs.
Small business tax relief
There are several government schemes designed to reduce the tax burden for small businesses:
Annual Investment Allowance (AIA): Claim 100% tax relief on qualifying capital investments, like equipment and machinery, up to £1 million.
Employment Allowance: Reduce your employer NICs bill by up to £5,000 annually.
Research and Development (R&D) Relief: Available to innovative businesses, allowing enhanced deductions or payable credits for qualifying R&D activities.
Seed Enterprise Investment Scheme (SEIS): Attract investors with income tax and CGT reliefs for investing in your small business.
FAQs
How much do business owners pay in taxes?
The amount business owners pay varies significantly based on their business structure, profits and location. However, corporate tax is charged at 25% for companies with profits over £250,000 for 2024.
Do all businesses need to register for VAT?
No, only businesses with an annual taxable turnover exceeding £90,000 must register for VAT. However, voluntary registration can benefit certain businesses.
What happens if I don’t pay my taxes on time?
Failing to pay taxes on time can result in penalties, interest charges, and potential legal action from HMRC. Filing late tax returns also incurs fines, even if no tax is owed.
Are there tax benefits for start-ups?
Yes, start-ups can benefit from schemes like small business rate relief, R&D tax credits, and SEIS to reduce their tax burden and support growth.
Can I deduct all my business expenses?
Not all expenses are tax-deductible. Allowable expenses must be 'wholly and exclusively' for business purposes, such as office supplies, travel, and employee wages.
What else do I need to consider post-incorporation?
Post-incorporation compliance includes filing annual confirmation statements with Companies House, preparing and submitting annual accounts, and ensuring corporation tax returns are completed on time. Companies must also maintain statutory records such as registers of shareholders, directors and significant control. If you're considering incorporation, our memorandum of association solicitors are here to help.
Final thoughts
Navigating small business tax may feel daunting, but understanding your obligations is key to managing your finances and staying on the right side of HMRC. Whether it’s paying corporation tax, registering for VAT, or claiming small business tax reliefs, careful planning can make a huge difference.
If you need legal advice, our small business solicitors are on hand. Get started today for a free, fixed-fee quote.
References
Capital gains tax from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant. Bear in mind that tax rules can change and will differ based on your circumstances.