Small businesses, and the individuals who run them, are subject to a wide array of taxes – from Corporation Tax to National Insurance.
Here is an overview of the main UK business taxes you will encounter as a business owner, together with links to our more in-depth guides.
This guide has been updated for the 2023-2024 tax year
Corporation Tax is a tax on limited companies’ taxable income or profits.
For Corporation Tax, companies have to calculate their own tax liabilities and must pay the calculated tax to HMRC without prior assessment.
Payment of Corporation Tax itself is due 9 months and one day after the company’s “normal due date” – usually the last day of your annual accounting period.
What are the current rates of Corporation Tax?
The rates of Corporation Tax increased in April 2023.
- 19% on profits up to £50,000.
- 26.5% on profits between £50,000 and £250,000.
- 25% on profits above £250,000.
Value Added Tax (VAT)
Value Added Tax (VAT) is a tax on the final consumption of certain goods and services in the home market but is collected at every stage of production and distribution.
Most business-related goods and services will therefore be subject to VAT. There are several UK VAT rates, the standard rate being 20%.
Companies should register for VAT if the value of their taxable supplies in a 12 month period is greater than the current VAT registration annual threshold of £85,000 (as of April 2023).
Businesses should also register for VAT if the predicted value of their taxable supplies in the next 30 days alone is expected to exceed the annual VAT threshold. It is important to remember that turnover is the amount of money going through the business, not just the profit.
All VAT-registered businesses must submit their VAT returns online, and settle any outstanding tax liabilities electronically.
Read ByteStart’s guide to Value Added Tax (VAT) for start-ups and small businesses for the full details.
Alongside the main VAT rules, some small businesses may be better off by operating within the flat rate VAT scheme which has been running since 2002.
In essence, instead of paying HMRC the total VAT charged on invoices minus any input VAT you may reclaim, you charge a fixed percentage of your gross turnover and pay that amount to HMRC each year.
National Insurance is a deduction from earnings, set up originally to fund various State benefits such as the NHS, the State pension and other welfare-related schemes. In reality, it is just another tax.
Sole traders pay income tax on their business profits (as self-employed individuals). In addition to PAYE (income tax), they are liable to pay Class 2 and Class 4 National Insurance Contributions (NIC’s).
You can find full details of the NICs self employed people are subject to in Sole trader tax – a guide for start-ups and the newly self employed.
Unlike sole traders, for tax purposes, if you are a director of a limited company, you are an ’employee’ of the company. You are therefore liable to pay Class 1 NIC’s on your earnings. The limited company is also liable to pay Class 1 NIC’s as your ’employer’.
All companies employing staff can benefit from the Employment Allowance, whereby they will be able to reclaim up to £5,000 in Employers’ NICs, which represents a significant tax break to businesses with employees.
You can find a full explanation of the various rates and thresholds for the different Classes of NICs company directors and sole traders are liable for in ByteStart’s Guide to National Insurance Contributions for small businesses.
Pay As You Earn (PAYE) is a scheme operated by HMRC to deduct income tax and NICs from employees as they earn it.
If you run your business as a sole trader, then you are self employed and not affected by PAYE. You self assess your income and complete a tax return each year.
If you run a limited company and draw a salary, then you are an employee (even if you are a director).
You need to understand PAYE and what your obligations as an employer are. It’s a deeply complicated subject with many rules, and you would be well advised to get professional advice on your particular situation.
All payroll data is submitted to HMRC in ‘real time’, rather than simply at the end of each tax year.
For more details, read ByteStart’s overview of the PAYE Scheme.
Businesses may have to pay Stamp duty for transactions on the transfer of land or interests in land; grants or assignments of leases; and transfers of chargeable securities such as shares in companies.
These are split into two different types of Stamp duty. The first, Stamp duty land tax is applicable if you rent or buy premises, and can catch small businesses out when they are first establishing roots.
The second, Stamp duty reserve tax, may apply when you purchase shares or other securities.
Read our dedicated guide to Stamp Duty for more.
Capital Gains Tax
From 6th April 2008, the Government has applied a flat 18% CGT rate on business disposals. However, the so-called “entrepreneurs relief” scheme allows business owners to pay a reduced rate of 10% on business disposals up to a lifetime allowance of £1 million. This lifetime allowance was reduced from £10 million in 2020.
Read our Entrepreneurs’ Relief (BADR) Guide for the full details and qualifying criteria.
The system of tax relief on investment in business equipment can be complicated. As a rule of thumb, when your business makes a significant investment in capital equipment, you cannot normally set the entire purchase cost against that year’s profits.
Exceptions to the rule can include instances when the value of the purchased item is small, or a particular tax relief applies.
The cost of buying more expensive items is written off against company profits over a number of years, using the Capital Allowances System.
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