• Emma Walsh

What are the main taxes for Small Business?

Small businesses, and the individuals who run them, are subject to a wide array of taxes – from Corporation Tax to National Insurance.


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.

Corporation Tax

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 tax calculated to HMRC.


Payment of Corporation Tax is due 9 months and one day after the company’s “normal due date” – usually the last day of your annual accounting period.


The current Corporation Tax rate is 19%.


Value Added Tax (VAT)

Value Added Tax (VAT) is a tax on the final consumption of certain goods and services, it is collected at each 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 2021).


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 the profit.

All VAT-registered businesses must submit their VAT returns online, and settle any outstanding tax liabilities electronically.

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.

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

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).

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 £4,000 in Employers’ NICs, which represents a significant tax break to businesses with employees.

PAYE

Pay As You Earn (PAYE) is a scheme operated by HM Revenue & Customs to take income tax 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 will self assess your income and complete a tax return.

However 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 complicated subject with many rules. It is advisable to get professional advice on your particular situation.

All payroll data is submitted to HMRC in ‘real time’ by RTI submissions, rather than at the end of each tax year.


Stamp Duty

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.

The second, Stamp Duty Reserve Tax, may apply when you purchase shares or other securities.

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. The lifetime allowance was reduced from £10 million in 2020.

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Capital Allowances

The system of tax relief on investment in business equipment can be complicated.


As a rule, 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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