Small Business Tax: what you need to pay

From corporation tax to VAT, and capital gains tax to capital allowance, find out how these taxes work when you run a small business.

What taxes do small businesses pay?

When you own a small business, the sort of tax you pay and how you pay it will be determined by the structure of your firm.

The tax bill of a lone trader will differ from that of a limited business or partnership.

In this tutorial, we’ll go through the taxes you may expect to pay as a business owner, as well as how they’re calculated. More detailed information can be found in our guide to each specific tax.

Corporation tax

19% –Limited Companies

Corporation tax is levied on earnings made by limited corporations, not solo proprietors or partners.

It is computed after salaries and other business expenses have been paid, but before dividends are distributed.

Companies, unlike individuals, do not benefit from any form of personal allowance, thus tax must be paid on all profits.

Corporation tax is a flat 19 percent fee, regardless of the company’s profit.

How to pay

As each business’s accounting year is different, filing and paying corporation tax can be tricky.

Each year, you’ll need to submit a CT600 form to HMRC – also known as a company tax return – providing details of the company’s income, as well as deductions for tax allowances and expenses. This is due 12 months from the end of your company’s accounting date.

Your corporation tax bill, on the other hand, must be paid nine months and one day after the end of your company’s accounting date. In practise, it becomes sense to file your company tax return as soon as possible to determine how much corporation tax you owe.

It is up to the company to declare how much corporation tax it must pay. HMRC will not give you instructions.

If you pay your tax late, file your tax return after the deadline, or provide false information, you may face an HMRC fine.

To pay, log into your HMRC account and select a payment option, such as online payment, direct debit, company credit card, or bank transfer. Payments can also be made over the phone.

You can’t use a private credit card, and you can no longer pay at a Post Office.

Value Added Tax (VAT)

20% – customers of VAT-registered businesses

VAT is a tax that’s added to most goods and services. Most things attract the standard VAT rate of 20%, but some – including children’s car seats and home energy – have a reduced rate of 5%.

If your company is VAT-registered, you must charge your customers VAT on top of your prices. But you’ll also be able to reclaim VAT that you pay on business expenses.

Companies don’t have to register for VAT unless their annual taxable turnover exceeds the VAT threshold, which in 2021-22 is £85,000.

However, you can do so voluntarily. This gives you the advantage of claiming VAT back for anything you purchase for your business – including the likes of laptops, tools and stationery. However, it does mean you’ll have to submit VAT returns to HMRC.

How to pay

You have to submit VAT returns every three months, even if you have no VAT to pay or reclaim.

As of 1 April 2019, businesses must send their returns under the new Making Tax Digital initiative.

This requires you to register for Making Tax Digital, keep digital VAT records and submit your VAT returns to HMRC using compatible software.

Business rates

If you conduct your business from an office, shop, factory, or warehouse – somewhere that isn’t a domestic property – you’ll almost certainly be charged business rates on this property.

Local governments compute and send out business rates bills in the same way that they do council tax. Typically, you’ll receive the bills around February or March, outlining what you need to pay for the fiscal year that begins on April 1st of the following year.

Business rates are calculated on the property’s ‘rateable value’ meaning its estimated value on the open market if you were to sell it. The Valuation Office Agency (VOA) carries out revaluations of commercial properties. The most recent revaluation came into effect on 1 April 2017 and refers to values as of 1 April 2015.

There are a few instances where you can be charged business rates if you run a business from your home. This could happen if:

• you employ staff who come and work at your home
• you sell goods or services from your home to customers who visit the property
• you’ve adapted your home to work there – for instance, converted a garage
• the property is part-business and part-domestic – for instance, a pub with living quarters above it.

Small business rates relief

If your property’s rateable value is less than £15,000, and your business only uses one site, you may be able to get business rates relief.

For properties with a rateable value of less than £12,000, you’ll pay no business rates. For properties with a rateable value between £12,001 and £15,000, the rate of relief will gradually reduce from 100% to 0%.

So, for example, if your property’s rateable value is £14,000, you’ll get 33% off your business rates.

To apply for this relief, you’ll need to contact your local council.

How to pay

Business rates are paid to the local authority where your business premises is located. Like council tax, most councils split the bill into 10 payments, to be paid over the course of 12 months.

Most will accept various payment methods such as direct debit, paying by phone, online and at your own bank.

Dividend tax

7.5% – basic rate

32.5% – higher rate

38.1% – additional rate

If you’re a company shareholder, you can pay yourself in dividends. The first £2,000 are tax-free, but if you receive any more than this, you’ll have to pay dividend tax.

The rate you’ll pay depends on your income tax band. Basic-rate taxpayers pay at 7.5%; higher-rate taxpayers pay 32.5% and it’s 38.1% for those who pay additional-rate tax.

If your only income is from dividends, you can use up your personal allowance in addition to your dividend allowance.

For the 2021-22 tax year, that means you can earn the £12,570 personal allowance, plus the £2,000 dividend allowance – meaning you could earn a total of £14,570 from shares before having to pay any tax.

To reduce the tax you pay further, you could transfer shares into a stocks and shares Isa to avoid paying tax in the future. However, you’ll be limited to deposits of £20,000 into an Isa in each tax year.

How to pay

You need to include any dividend income in your self-assessment tax return.

Income tax

20% – basic rate

40% – higher rate

45% – additional rate

Because income tax is solely due by people, business owners will not be required to pay income tax on the business itself.

However, if their earnings exceed the personal allowance (£12,570 in the 2021-22 tax year), they must pay income tax.

The amount you pay is determined on your tax bracket. Keep in mind that additional profits, such as dividends, savings interest, or capital gains, may be counted as income and drive you into a higher tax bracket.

How to pay

If you’re a sole trader, you’ll pay income tax on the profit you make from your business. You’ll need to submit a self-assessment tax return to HMRC to calculate how much you owe.

If you’re paid by the company, income tax will be taken through the company’s PAYE scheme. It’s at this point you’ll also pay any personal National Insurance contributions you owe.

National Insurance

13.8% – employer NI contribution

If your company employs employees, you must pay the employer’s share of National Insurance contributions to HMRC directly. In 2021-22, employers must pay 13.8 percent in NICs for employees earning more than £9,568 per year.

However, if your company qualifies for the Employment Allowance, you may be able to lower your NICs by up to £3,000 every year. This initiative was initiated in April 2014 with the goal of assisting small firms in hiring additional employees.

From April 2020, only organisations with NICs of less than £100,000 will be eligible.

In addition, if you’re employed by your limited company, your National Insurance contributions will be taken automatically through payroll.

Sole traders pay National Insurance as part of self-assessment tax.

For the 2021-22 tax year, self-employed NIC works like this:

• those with profits of less than £6,515 won’t be required to pay.
• those earning between £6,515 and £9,568 will pay Class 2 contributions of £3.05 per week
• profits between £9,568 and £50,270 will qualify for 9% class 4 contributions (plus Class 2)
• anything over £50,270 will be charged a Class 4 rate of 2%.

Capital Gains Tax (CGT)

10% – basic rate

20% – higher and additional rate

When you sell something for a profit, you must pay CGT. For most people, this is their things. It is paid to small business owners if they sell or give up an asset, shares, or their entire firm.

The rate you pay is determined by your individual income tax bracket; basic-rate taxpayers pay 10%, while higher- and additional-rate taxpayers pay 20%. If you sell a property that is not your primary residence, the rate rises to 18% for basic-rate payers and 28% for higher- or additional-rate payers.

Keep in mind that capital gains will be included in your taxable income for the year, so a substantial profit may put you into a higher tax band.

To work out how much you’ll pay on the sale of your business, you can take the sales price, and deduct what you paid for it, as well as any investments in the business and costs related to buying or selling it. Then you’re left with the gains.

From this, you can deduct your personal capital gains allowance. In 2021-22 individuals can earn up to £12,300 before tax, and couples can pool their allowances.

Entrepreneurs’ relief

In some circumstances, you may be able to claim entrepreneurs’ relief to reduce the CGT you have to pay. If you qualify, you’ll pay a lower CGT rate of 10% on the first £1m of gains.

This allowance is applied per person, rather than per business that you sell.

You may be able to claim if:

• you are a sole trader or partner selling part or all of your business or its assets
• you control at least 5% of the company’s net assets, of which you are selling and are entitled to 5% of it distributable profits
• you sell assets from the business within three years of closing down.

You’ll need to have been in qualifying circumstances for at least two years, and the relief doesn’t apply to property portfolios – though the one exception is furnished holiday letting businesses.

Any gains above the £1m threshold will be taxed at the full CGT rate.

How to pay

You’ll need to include capital gains as part of your income tax return.

Capital allowances

You can claim capital allowances when you buy certain tools to use in your business, such as company vehicles, equipment and machinery.

You can deduct some or all of the cost of these items from your profits before paying tax, which will reduce your tax bill.

The annual investment allowance (AIA) for sole traders, partners and limited companies has been temporarily increased to £1m until December 2021. This is applied to the portion of a company’s tax period before 1 January 2022. The AIA is £200,000 for the portion of the tax period on or after 1 January 2022

You can also use the ‘writing down allowance’ for assets that fall outside the AIA rules.

How to claim

Sole traders can claim as part of their tax return. Partners claim through a partnership tax return and limited companies can use a company tax return.

If you’re a sole trader or partner with an income of less than £150,000 a year, you may be able to use a simpler ‘cash basis system instead.