Understanding Small Business Taxes in the UK

22 February 2021 David Robinson View all News

Starting up a business is one of the most exciting investments a person can make, both in terms of time and money.

Taking charge of your own success and becoming your own boss could be a life changing move for you, which makes it even more important to make sure you understand the small business taxes that you will be encountering!

These small business taxes include, but are not limited to, the following:

  • Corporation Tax
  • National Insurance
  • Value Added Tax (VAT)
  • Business Rates
  • Capital Gains Tax

This guide will help you understand which small business taxes you will need to pay, whether trading as a freelancer, contractor, limited company, partnership or sole trader.

Corporation Tax for Small Businesses

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Corporation Tax is payable by all UK resident limited companies, as well as UK branches of overseas companies. The current UK Corporation Tax rate is 19% and is levied on the annual profits made by a trading company, whatever its size.

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

Please be aware, 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

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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 (£6,475 in 2020-21), 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 £184 a week for the year 2021-22. If they earn between £184 and £967 a week, employees will need to contribute 12% 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 £170 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

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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 £85,000 (2021).

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

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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 are calculated based on what your property would be worth if you were to sell it on the open market; this is known as the property’s rateable value.

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.

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

Capital Gains Tax for Small Business owners

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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.

There are two rates of Capital Gains Tax. There is a basic rate of 10%, which is payable for those who pay Income Tax at the basic rate; there is an additional CGT rate of 20%, which is payable for those who at a higher or additional rate of Income Tax.

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

Depending on qualifying criteria, Entrepreneurs’ Relief may be available to reduce the Capital Gains Tax you pay. Get in touch with our Private Client team today if you require advice.

Companies making disposals of capital assets pay Corporation Tax, at 19%, on gains instead of paying Capital Gains Tax. The calculation of the gain for a company is largely the same as for an individual.

Speak to us today for Small Business Tax assistance

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Whatever your business does and however much you earn, Small Business Taxes will be involved. Making sure you keep on top of each of these taxes is good for your business health, not to mention your own stress levels as a business owner.

Shorts are experts in both business taxes and personal taxes for business owners; whatever your situation, we can make navigating small business taxes easier and more rewarding. Speak to us today to see how we could help.

Tax-Saving Tips for Individuals and businesses

Written especially for entrepreneurs and owner-managed businesses, this guide is full of planning ideas and tax risks to avoid.

If you're looking for ways to reduce your liability, claim your copy and start planning how you could pay less tax.

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