Here we unpick what tax means for UK small businesses and cast light on the main obligations you are likely to come across as a business owner.
Income tax and Self Assessment
All self-employed business owners and company directors must complete a Self Assessment tax return each year.
Sole traders and partners are taxed on business profits after deductions for expenses. To keep on top of this you should keep full records of income and outgoings, including records of the sale or purchase of business assets such as machinery or computers.
Good record-keeping, which means storing your receipts, statements and invoices in a single ordered file, can save you time by preventing last-minute scrambles for missing receipts when it comes to completing your tax return. Online filing of tax returns can make things easier as you can stop, save and come back to your tax return at any point before submitting it. Calculations are done automatically and any refunds due are calculated instantly and tend to be processed quicker than with the paper process.
There’s also a flat rate system called simplified expenses for calculating running costs linked to business vehicles, working from home and living in your business premises.
What Self Assessment means for company directors
Everybody who is required to fill in a tax return has to detail their income from all sources. If your business is trading as a company with you as a director then whether or not any additional tax for this will be payable under Self Assessment is determined largely by how you decide to reward yourself for your work.
For instance, if the only financial benefit you receive from the business is a salary, taxed through PAYE, then no additional payment may be due. Alternatively, you may decide to pay yourself a small basic salary (to correspond with your tax-free personal allowance, for instance) and then top this up with dividends and/or with ‘benefits in kind’, such as a company car. In such circumstances, any tax due for this will be collected through Self Assessment.
When is tax due under Self Assessment?
- The personal tax year runs from April 6- April 5 the following year. At the end of each tax year, you will receive a notice to complete your tax return.
- Paper returns must be received by HMRC by October 31. Online returns must be submitted by January 31.
- All tax payable for any tax year must be received by January 31 the following calendar year.
- If your previous year’s Self Assessment tax bill was more than £1,000 you are generally required to make a payment on account on January 31 and July 31. Each payment is equivalent to half your previous year’s tax bill.
- You can help spread your outlay throughout the year by using the HMRC’s budget planner and/or by paying through direct debit.
National Insurance and small businesses
There are four classes of National Insurance Contributions (NICs) typically relevant to business owners. Which ones apply depends broadly on how your business is structured and how much profit you make.
Sole traders and NI
Class 2 NICs
This is a flat rate contribution paid by all self-employed persons where your annual profits are more than the ‘small profits threshold’ (£6,515 based on 2021/2022 rates). The amount payable as of the 2021/2022 tax year is £3.05 per week.
Class 4 NICs
This is a profit-based contribution payable at 9% on profits between £9,569 and £42,385 and at 2% on profits above £50,270 (on 2021/2022 rates).
You can stay up to date with National Insurance rates here, on the government’s website.
Company directors and NI
Class 1 NICs
As a director of your own company, you are classed as an employee and as such Class 1 NICs apply. These are calculated as a percentage of your wages and you can view the current rates here. The company (a separate legal entity) is responsible for the employer’s contribution. The employee’s contributions are collected and paid through the PAYE system. If you receive ‘benefits in kind’ you may also have to pay Class 1A NICs.
This is payable on the profits and taxable income of companies. Very soon after you set up your company HMRC will send your company’s Unique Taxpayer Reference (UTR) to your registered office address. You then have three months to provide HMRC with some basic information about your company, including the date you started the business, the type of business you are and the date you’ll make your annual accounts up to.
Corporation Tax payments are due 9 months and one day after the company’s ‘normal due date’, which is usually the last day of your annual accounting period. the Corporation Tax rate for 2021/2022 is a flat 19% but this is due to change in 2023. A company that has a profit of under £50,000 will pay 19% Corporation Tax (the same as it now), however, if a company has profits of over £50,000, Corporation Tax will be 25%. This can be reduced if the business profits are between £50,000 and £250,000 due to marginal relief. You can find more info on this here.
As in the case of sole traders you are taxed on profit fewer expenses. Companies can also qualify for various reliefs such as the Research and Development Relief.
For Corporation Tax you must prepare annual accounts, including a balance sheet, profit and loss accounts, statutory notes about the accounts and a director’s report. It sounds more daunting than it is in practice and there are streamlined procedures including a simpler balance sheet for a ‘micro-entity’ that has two of either:
- A turnover of £632,000 or less.
- £316,000 or less on its balance sheet.
- 10 employees or less.
VAT and small businesses
Most business-related goods and services are classed as ‘taxable supplies’ for VAT purposes. For the majority of these, the standard VAT rate of 20% applies. Currently, if the value of your taxable supplies in the past 12 months has exceeded the current VAT threshold of £85,000, you have to register for VAT purposes. Even if you’re below that limit it can still make sense to register, especially if you sell mainly to VAT registered businesses. An accountant should be able to advise you on whether VAT registration is right for your business.
In simple terms, your business pays VAT on all purchases you make (input tax) and charges VAT on all sales it makes (output tax). At the end of a VAT period, you pay the difference to HMRC or else you are refunded the difference if you have paid more than you received.
VAT-registered businesses must submit their VAT returns online.
We hope this guide to UK tax for small businesses was helpful. If you’d like to find out more about VAT, Self Assessment, PAYE and choosing the right structure for your business, browse our help centre.