Taxes every small business owner should be aware of

Starting a small business can be stressful and is often accompanied with various issues that occupy your attention.

It’s no surprise then that thinking about tax is often pushed to the side. However, it is not something you can afford to forsake as there are substantial penalties for businesses that are late or inaccurate with their tax returns.

Specific taxes that apply to your business depend on its structure, products, services and performance.

Here we discuss some of the most common taxes that every business owner, small trader or partnership should be aware of.

Income Tax

Income Tax is paid on certain income you personally receive, such as salary and dividends and rental income. Income Tax is not payable on any income from the sale of assets, such as share disposals or if you sell a property which is not your main residence – this would be taxed under Capital Gains.

You’ll start paying income tax on your business’s profit once it goes over the personal allowance, which is ￡12,500 if you’re under the age of 75.

If your business earns between ￡12,501-50,000, you’ll pay a basic 20% income tax rate. If your earnings are between ￡50,001 and ￡150,000, you’ll pay 40%. A 45% rate applies to businesses with a taxable income of more than ￡150,000.

National Insurance

Even though this isn’t labelled as a ‘tax’, it is still money that’s being paid to the Government, and it should be a major consideration for any business owner.

National Insurance (NI) helps to build up your state pension and pay for public services. NI will be taken via PAYE for limited company directors.

The payment process for sole traders is a little different:

Sole traders pay two kinds of NI. If you’re a sole trader, you’ll pay a flat weekly rate of NI called Class 2 NI, unless your business’s profits are under the Small Profits Threshold, which is ￡6,475. 

Class 2 NI is ￡3.05 per week. If your business’s profits are under the Small Profits Threshold, you can still pay Class 2 NI voluntarily, to protect your entitlement to State Pension and other benefits. 

More info on NI rates can be found here.

VAT

Value Added Tax (VAT) is added to the price of most goods and services. Both limited companies and sole traders can register for VAT. VAT-registered businesses must charge VAT to customers, but also have the benefit of being able to reclaim any VAT that they have paid on business expenses or purchases.

If your business makes VATable sales of more than ￡85,000 a year, you’ll have to register your business for VAT. ‘Vatable sales’ means sales of goods or services that would have had VAT charged on them if made by a VAT-registered business.

VAT is currently set at 20% for the standard rate, the reduced rate is 5% and there is a 0% rate for some exceptional goods. These have been the set rates for just over ten years (4th January 2011).

Corporation Tax

Corporation tax is applied to the profits earned by limited companies – not sole traders or partners. It's calculated after salaries and other business expenses have been paid, but before dividends are withdrawn.

Unlike income tax, companies don't benefit from any kind of personal allowance, so tax must be paid on all profits. Corporation tax has a flat 19% charge, regardless of how much profit the company makes.

More info on rates and allowances for Corporation Tax can be found here.

Business Rates

If your business is run from an office, shop, pub, factory or warehouse (anywhere that isn't a domestic property), then it's likely you'll be charged business rates on this property. In a similar way to council tax, business rates bills are calculated and sent out by local authorities.

Your local council will send you a business rates bill in February or March each year. This is for the following tax year. It is possible to estimate your own business rates bill. Additionally, you may also meet the criteria to get business rates relief from your local council to reduce your bill. 

Do you need assistance in understanding and meeting your tax obligations?

I can provide bespoke guidance and advice to sole traders, partnerships and small businesses. 

Get in touch to set up an informal consultation.