What is small business tax and who pays it?

Revolut Contributor

 · September 23, 2020  · 09/23/2020

If you’re self employed and run your own business, you need to take responsibility for managing your taxes. Being on top of the small business taxes you’ll pay helps avoid surprises in the future.

This may be a change for you if you’ve recently started your own business, as when you have a regular employment, your employer will automatically deduct your taxes from what you earn – meaning you won’t need to worry about taxes at all.

Here’s a whistlestop tour of the key taxes you may have to pay – from untied, the UK’s personal tax app.

You may not have to pay all of these taxes, the specific taxes that apply to your business will depend on its structure, the products and services it offers and its performance.

The key taxes you should be aware of if you’re self-employed:

  1. Income Tax. If you work in your own name you will have “trading income”. If you have a company and pay yourself a salary or dividends, then this will also be subject to income tax. Your trading income will also be subject to a type of National Insurance which is due at the same time
  2. Corporation Tax if you have a limited company
  3. Value-Added Tax (VAT) – you are required to register if your turnover hits £85k, and to file quarterly returns
  4. Employers’ PAYE and National Insurance (If you employ others, or take a salary from your limited company)
  5. You may also have to pay Business Rates if you work from a dedicated premises

Submit your self-assessment tax return quick and easily with untied. untied makes creating your return simple by linking your UK bank to the app. From here, you can tag your work-related income and expenses across the year and submit your tax return directly through the app.

There are also other types of small business tax to be aware of:

1. Income Tax

The first £12,500 is generally not taxed. It is your personal allowance. Beyond this, income tax is charged in bands – starting at 20% and rising to 45% the more that you earn.

If you earn £100,000-£125,000 then you will also find that your personal allowance is reduced – it results in a high marginal rate of tax in this range.

You will not have to pay any income tax on the first £1,000 of your self-employed income, this is also known as your ‘trading allowance’.

You’ll be paying Income Tax through self-assessment, so these are the deadlines you need to bear in mind:

  • register with HMRC by 5 October following the end of the tax year (if you have not already done so)
  • 31 January for filing online tax returns (31 October for paper tax returns – though why would you?)
  • 31 January for making payments
  • 31 July for a mid-year payment

You can learn more about self-assessment tax here.

2. Corporation Tax

You’ll need to pay this tax on profits if you’re running a limited company. You will also need to prepare accounts.

You will not be billed for this tax, so it’s up to you to remember to pay it. You will need to register online with HMRC.

It is charged at a 19% flat rate after salaries and other business expenses have been paid, but before dividends are withdrawn. There is no personal allowance, so this tax is paid on all profits.

The deadline to file your return is 12 months after the end of your accounting period. You’ll need to submit a CT600 form to HMRC.

Read also: How to register for corporation tax

3. Value Added Tax (VAT)

If your business sells products and services and you are registered for VAT, you will need to charge your customers VAT. You’ll then pay this VAT to HMRC and submit VAT returns, generally on a quarterly basis. You will also be able to claim VAT back on what you have bought. The standard VAT rate is 20%, although some products and services will have reduced VAT or be exempt (if you’re supplying exempt services such as financial services then this will reduce your ability to reclaim VAT).

You can register your business for VAT at any time, but if your taxable turnover is above £85,000, you must register immediately.

The deadline for submitting your return is one calendar month and seven days after the end of your accounting period. You’ll find your return in your VAT online account. You will have to submit these returns every three months, even if you have no VAT to pay or reclaim.

There are several VAT simplification schemes which are available to small businesses.

4. Employers’ PAYE

If you’re an employer, you will need to take account of:

  • Employee Income Tax deductions
  • Employee National Insurance
  • Employer national insurance

You must pay your bill by:

  • the 22nd of the next tax month if you pay monthly
  • the 22nd after the end of the next quarter if you pay quarterly

There are monthly and annual reporting requirements which are best managed through payroll software.

5. National Insurance - Employment

Your National Insurance payments depend on the type of business you’re running, and whether you employ anybody.

Businesses pay 13.8% for employees with earnings above £9,500 per year. You may be able to reduce this by up to £3,000 if the business is eligible for an Employment Allowance.

6. National Insurance – Self-employment

Self employed people (i.e. trading in their own name) pay two types of National Insurance – a flat rate Class 4 and a percentage based Class 2.

For those with low profits then no National Insurance is due.

If you’re using untied, your National Insurance is automatically calculated based on the information you provide.

Note that the National Insurance thresholds are different to those for income tax – just because you are earning below the personal allowance, you may still have to pay National Insurance. Not paying National Insurance could affect your state pension.

7. Business Rates

You will have to file for and are charged for this tax if you operate from a specific, dedicated location.

You can be charged business rates if you run a business from your home. This could happen if: you employ staff who work at your home, if you sell goods or services from your home to customers who visit the home.

You will receive a bill from your local council in February or March each year. This will be for the upcoming tax year.

If your property's rateable value is less than £15,000, and your business only uses one site, you may be able to get business rates relief. For properties with a rateable value of less than £12,000, you'll pay nothing. For properties with a rateable value between £12,001 and £15,000, the rate of relief will gradually reduce from 100% to 0%.

8. Dividend Tax

If you take money from your own company as a dividend, then this will also be subject to income tax.

Dividends are charged at 7.5% for basic rate payers, 32.5% for higher rate payers and 38.1% for additional rate. You need to include any dividend income in your self-assessment tax filing – and of course you can use untied to do this.

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About the author

Untied is the UK’s personal tax app.  Visit www.untied.io to learn more.

Opinions stated are Untied’s own, and do not reflect those of Revolut or Revolut Business.