Business tax – a guide for small businesses

Which business taxes you’ll need to pay as a small business will depend on the structure you’ve chosen – either a sole trader (self-employed), limited company, or partnership, plus how well it’s performing and how you pay yourself as the owner. 

In this piece we’ll cover the key details of the main types of business tax you might have to pay, plus when you need to pay them and how best to do so.

The main taxes small businesses might have to pay are: 

We also look at: 

Paying corporation tax as a small business

Corporation tax is basically income tax for limited companies – the way you pay tax on your business’s profits. 

If you’re a sole trader (self-employed) you’ll pay income tax instead, but we’ll look at this later. 

Limited companies need to pay corporation tax on any investments and other income that comes in from selling assets too (like property or company shares). 

Find out more about corporation tax in our full guide. 

When is the corporation tax deadline?

The corporation tax deadline can be a little fiddly, because it’s nine months and one day after the end of the accounting period for your last financial year. 

You need to pay your corporation tax before filing your company tax return (also known as form CT600). You still have to do this if you’re technically making a loss and don’t owe any corporation tax – HMRC needs to know.  

Find out more about filing a company tax return

Corporation tax rates – what do you need to know?

The corporation tax rate for company profits is between 19 per cent to 25 per cent, depending on your profits. 

The new Labour government has committed to capping the headline rate of corporation tax at 25 per cent, meaning it won’t rise during the party’s next four years in office. 

Corporation tax payments 

You must register for corporation tax within three months of starting to trade. Trading means buying and selling, of course, but also advertising your services, renting a property or employing someone. 

You can do this via the government website as part of setting up your limited company

Income tax for the self-employed

If you’re a sole trader (self-employed), you need to pay income tax instead of corporation tax. 

To do this, you’ll need to file an annual Self Assessment tax return and pay any tax owed. This is due by 31 January every year. 

Find out more about filing your Self Assessment tax return

Income tax for employers

But if you’re a limited company and employ others, you’ll need to make sure every employee (and company director, if you have any) pays income tax on their salary. 

To do this you’ll need to register your company with PAYE (Pay As You Earn). This will let you HMRC to collect income tax (and National Insurance, which we’ll touch on later) from your payroll.

The PAYE tax year runs from 6 April to 5 April the following year, which is when you’ll need to complete your end-of-year PAYE return.

Find out more about PAYE as an employer.

Income tax rates – how much tax do you have to pay?

Self-employed business owners and employees get the same personal allowance. You’ll need to pay 20 per cent income tax on anything you earn over this amount, then 40 per cent if you earn over the next threshold. 

The overall rates are slightly different in Scotland to England, Wales, and Northern Ireland, as income tax is a devolved responsibility. Take a look at the current rates in our income tax rates guide. 

What do small businesses need to know about VAT?

VAT stands for Value Added Tax, which is a type of tax added to most goods and services that a business would sell, normally at 20 per cent. 

You can only charge VAT if you’re a VAT registered business, and you’re legally required to do this if your taxable turnover is larger than £90,000. You can choose to become a VAT-registered business if you bring in less, but it’s not compulsory. 

It’s important to keep in mind that your VAT taxable turnover is calculated on a 12-month rolling basis, so every month you’ll need to check if you’ve crossed the £90,000 threshold. You then have 30 days to register for VAT. 

Read our full guide on how to register for VAT.

VAT deadlines – when do you need to pay?

Businesses must pass the VAT they receive from customers on to HMRC as part of their VAT return.

Your VAT return due date is based on your accounting period. Businesses usually submit the form every three months, but you can choose to do it monthly or once a year through the annual accounting scheme. 

Find out how and when to file your VAT return with our full guide. 

What are the current VAT rates?

The rate of VAT depends on the product you’re selling or service you’re providing. There are three rates of VAT: 

  • standard rate (20 per cent)
  • reduced rate (five per cent)
  • zero rate (zero per cent)

Fuel and heating products are sold at the reduced rate, and things like good and children’s clothes are zero rate. 

Learn how to work out how much VAT you owe with our VAT guide.

National Insurance for small businesses

National Insurance Contributions (NICs) are another tax on individual earnings. Contrary to income tax, these qualify you for benefits like your state pension. 

National Insurance is broken down into different ‘classes’. The class you pay depends on your employment status. 

Paying National Insurance: details for sole traders

Most self-employed people pay National Insurance through their annual Self Assessment tax return. 

How to pay National Insurance if you have a limited company

If you run a limited company as a company director, you’ll need to pay Class 1 contributions just like an employee. However contributions are assessed on your annual income rather than on what they earn each pay period (i.e weekly or monthly like an employee). 

You can make payments on account based on standard salary payment intervals (weekly or monthly) like other employees. 

Employers also need to pay secondary Class 1 NICs on their employee wages and director salaries. Employers’ National Insurance is classed as a tax-deductible expense for businesses, so could reduce your corporation tax bill. 

Find out more about what you’ll need to pay as an employer, or if you’re both self-employed and employed

How do business rates work?

Business rates are a tax on properties used to run a business. This usually applies to things like office buildings, shops, pubs, and warehouses, but you may have to pay them if you work from home. 

Home-based businesses might need to pay business rates if: 

  • your property is split into domestic and business parts, for example in the case of a flat above a shop
  • you sell things to people who visit the property
  • you employ anyone at your property
  • you’ve made changes to your home so you can run your business (like converting your garage)

You can contact the Valuation Office Agency (VOA) – the organisation that calculates business rates and valuations – if you’re not sure whether you should be paying business rates. 

When are the business rates deadlines?

In England, Wales, and Scotland, you’ll receive a business rates bill from your local authority each year in February or March. The bill will be for the following year with the option to pay over 10 months or 12 months, or in one lump sum. 

In Northern Ireland, business rates bills are sent out in April, with an option to pay monthly or in one lump sum.

Calculating business rates as a small business

Business rates are calculated using a property’s ‘rateable value’. The rateable value is a property’s estimated value on the open market. 

You can check the VOA’s rateable value for your property at any time – if you think it could be wrong you might be paying the wrong business rates. 

Check out our full guide on business rates to find out how to work out how much tax you owe.

Dividends tax – how does it work?

If you pay yourself a dividend as the owner of a business, you’ll need to pay tax on it. How much you pay and how will depend on your overall tax band and the total of your dividends. 

What are the dividends tax rates?

How much you have to pay depends on your income: 

  • basic rate income tax (£12,571 to £50,270) – any dividends over your allowance will be charged at a rate of 8.75 per cent
  • higher rate income tax (£50,271 to £125,140) – dividends over the allowance charged at a rate of 33.75 per cent
  • additional rate (over £125,140) – post-allowance dividends are taxed at a rate of 39.35 per cent

When are the dividends tax deadlines?

If your dividends are under £10,000, you can ask HMRC to change your tax code. If they’re over £10,000, you’ll have to do a Self Assessment tax return.

Find out more with our full guide to dividends tax.

How to reduce business taxes 

There are a number of ways you can reduce your tax bill – mainly tax relief schemes and deductible expenses. 

Small business tax relief

Tax relief schemes do what they say on the tin – reducing the amount you or your business needs to pay in tax. These schemes relate to most business taxes, including business rates, VAT, and National Insurance. 

These include: 

  • Employment Allowance – a National Insurance relief option of up to £5,000
  • Annual Investment Allowance – a capital allowance that lets you deduct the costs of plant and machinery from your profit 
  • business rates relief – discount on business rates from local councils 
  • research and development tax relief – limited companies can claim this if they work on innovative science and technology projects
  • creative industries tax relief – unsurprisingly, for businesses in the creative industries

See more options, eligibility criteria, and how to apply in our tax relief guide

Tax deductible expenses – what do you need to know?

Both sole traders and registered businesses can subtract allowable expenses from their overall tax bills. 

Sole traders (self-employed people) need to subtract self-employed expenses from their turnover when calculating their Self Assessment. These include the cost of travel, business premises, and staff costs related to a company’s operations. 

Limited companies can reduce their corporation tax bill with allowable expenses, similar to those used  by the self-employed. 

Business tax account: how to check your records 

Whether you’re a sole trader, limited company, or in a partnership, registering for a business tax account will help you keep track of the taxes you owe and pay them more easily. It’s not a legal requirement, but will certainly save you time and potentially prevent mistakes. 

You can register for a business tax account by: 

  • going to HMRC’s Business Tax Account registration page
  • registering for a new account 
  • entering your personal and business details
  • verifying your identity 
  • submitting your application 
  • waiting for an activation code 
  • activating your account and logging in

Do you have any further questions about business tax? Let us know in the comments.

More useful business tax articles 

Photograph: insta_photos/stock.adobe.com, Kittiphan/stock.adobe.com

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Lucy England

Lucy England has been writing for and about small businesses for around ten years. Initially working as a journalist covering tech startups, Lucy has extensive experience writing about insurance, fintech, tax and financial services for brands including Moneycorp and Muse Finance. Lucy has also supported a number of small businesses with their marketing, across industries as diverse as engineering and management consulting.

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