Small Business Taxes Guide (2024-25 Update)

This quick but comprehensive guide aims to give you a clear and concise overview of taxes that small UK businesses may need need to be aware of, including income tax, corporation tax, VAT, and National Insurance contributions. This includes different tax rates, thresholds, and filing deadlines, offering practical tips and advice to help you stay on top of your tax responsibilities.

What is a "small business" for tax purposes?

In the UK, the definition of a small business varies depending on industry and other factors. However, it is most commonly based on the number of employees, turnover, or balance sheet total.

According to the UK government, a small business is a company with:

• less than 50 employees, and;
• an annual turnover or balance sheet total of less than €10 million.

Other criteria may also apply to specific industries.

What taxes do small businesses pay in the UK?

Small businesses in the UK may be required to pay different types of taxes depending on their business structure, industry, and other factors. The most common types of taxes that small businesses may be required to pay include:

• Corporation Tax
• National Insurance
• Value Added Tax (VAT)
• Business Rates
• Employer taxes (Such as National Insurance contributions, PAYE tax, and the Apprenticeship Levy)
• Capital Gains Tax
• Income Tax (for small business owners who operate as sole traders or partners)

It's important for small businesses to understand their tax obligations and ensure they comply with all relevant tax laws and regulations. This guide will help you understand which small business taxes you will need to pay, whether you trade as a freelancer, contractor, limited company, partnership, or sole trader.

Corporation Tax on Small Businesses

Corporation Tax is payable by all UK resident limited companies and UK branches of overseas companies. The current main rate is 25% and is levied on annual profits over £250,000.

• However, small businesses may pay the reduced "Small profits rate" of 19%, which applies to companies with profits under £50,000.
• Companies with profits between these two thresholds will pay Corporation Tax at the new main rate of 25%, but with marginal relief reductions applied.

Corporation Tax is applied to the profits of limited companies after salaries and company expenses have been paid. It is not payable by partnerships or sole traders.

Corporation Tax is payable before dividends are paid to the shareholders of the small business.

For more information on Corporation Tax for small businesses, including how it works, how to register and pay, and what penalties may be involved, read our in-depth Corporation Tax guide.

National Insurance for Small Businesses

Whether you are an employee or director of a limited company earning over the National Insurance threshold, or you are self-employed while making a profit that exceeds the small profits threshold, you will be required to make National Insurance Contributions (NIC) if you are between 16 years old and pensionable age.

National Insurance Contributions help to fund vital public services: the NHS, employment and unemployment benefits, state pensions, and bereavement and maternity allowances.

How much National Insurance do you pay?

Employees must pay National Insurance Contributions if they earn more than £242 a week for the year 2021-22, known as the Primary Threshold (PT).

If they earn between £242 and £967 a week, employees will need to contribute 8% of their earnings above the starting level. For employees earning more than £967, the rate drops to 2% for the additional earnings.

National Insurance Contributions as an Employer

Employers, even small business owners, must make a secondary National Insurance Contribution of 13.8% of an employee’s earnings that exceed £175 per week. Unlike for employees, there is no upper limit for these contributions and employers must continue to make contributions for employees above pensionable age.

VAT for Small Businesses

VAT stands for Value Added Tax, and is a tax applied to the sale of certain goods and services sold within the UK.

There are three main rates of VAT that are chargeable by UK businesses, including small businesses. These are the 20% standard rate, which applies to most goods and services; a reduced rate of 5%, which applies to some goods and services such as home energy, children’s car seats, residential property conversions; and a 0% rate which applies to most foods and children’s clothing.

Registering a Small Business for VAT

Small businesses are not automatically registered for VAT, so small business owners will need to do this themselves once their annual turnover grows beyond the VAT threshold of £90,000.

You do not need to register your small business for VAT until you reach this threshold, but it may be beneficial to do so voluntarily, as you may then be able to claim back VAT on equipment or tools you buy for the business.

For more information on VAT for small businesses, including rates, exemptions, and advice, read our in-depth VAT guide.

Business Rates for Small Businesses

Business Rates is like Council Tax for businesses and is paid by businesses which operate from a non-domestic property, such as an office, store, factory, warehouse, or other facility.

Depending on the size and nature of your small business, you may simply be trading from home. If this is the case, you will not be required to pay business rates, subject to the below exceptions. Online freelancers and tradespeople are common examples of small businesses of this type.

If you are a small business owner operating from home, you may still need to pay business rates if you employ staff to come to your property; if you have developed, extended, or adapted your property to facilitate your business; or if you sell products to customers from your property.

How are Business Rates calculated for Small Business?

Business rates for small businesses in the UK are calculated based on the rateable value of the property they occupy. The rateable value is determined by the Valuation Office Agency (VOA), which is an agency of the UK government.

The rateable value represents the open market rental value of the property on a specific date, which is set by the VOA. This value is then used to calculate the amount of business rates that the business will be required to pay.

The exact amount of business rates that a small business will be required to pay depends on various factors, such as the rateable value of the property, the location of the property, and any applicable reliefs or exemptions.

Small Business Rate Relief

Small Businesses may be able to claim Business Rate Relief from the government if they meet the following criteria:

• The rateable property value must be less than £15,000.
• Only your business may be using the site.
• Your business only uses one property

No business rates are payable at all for properties with a rateable value of less than £12,000.

Capital Gains Tax for Small Business Owners

Capital Gains Tax (CGT) is payable whenever your unincorporated small business sells capital assets for a profit. CGT can apply to both partners and individuals; these assets include physical property, goodwill, or shares in a company itself.

To determine how much Capital Gains Tax will be payable, you can usually take the sale price, deduct what you originally paid for it, and deduct costs associated with buying or selling. The leftover figure is your capital gain on which Capital Gains Tax is payable.

Depending on qualifying criteria, Business Asset Disposal Relief may be available to reduce the Capital Gains Tax you pay.

When to seek professional advice

Small Business Taxes will be involved in whatever your business does. Making sure you keep on top of these taxes is good for your business health, not to mention your stress levels as a business owner.

The Shorts team features qualified and experienced experts in both business taxes and personal taxes for business owners. Whatever your business size or industry, if there is a tax challenge or opportunity relating to your small business, we can help you identify and resolve it.